While reading "The Dhandho Investor" by Monish Pabrai, I encountered chapter 5 to be extremely enlightening since it provides nine simple steps that constitute the framework for the Dhandho investor.
Focus on buying an existing business
Pabrai mentions that this is way less risky than starting up a new business. Thinking about it, with a business-model already in place, is way easier to identify current strengths and weaknesses than to start from scratch and develop a strategy.
Buy simple businesses in industries with an ultra-slow rate of change
We all know that capitalism has embedded creative destruction, and that disruptive forces are a constant threat to economic profits. In this constantly changing world, it is very important to stick to the things that are more stable and are least prone to change.
Buy distressed businesses in distressed industries
When we buy the ugly, it is very common that fear has already been priced, usually to the extreme. As an example, we can take a look at the energy sector and how some names as Klarman, among others, have started purchasing assets there.
Buy businesses with a durable competitive advantage – The Moat
Charlie Munger (Trades, Portfolio) and Warren Buffett (Trades, Portfolio) have been defending this point for a long time (with outstanding results, I may add), which allows a company to defend itself against the competitive environment.
Bet heavily when the odds are overwhelmingly in your favor
Charlie Munger (Trades, Portfolio) said the following: “To us, investing is the equivalent of going out and betting against the pari-mutuel system. We look for the horse with one chance in two of winning, which pays you three to one. You’re looking for a mispriced gamble.” I don’t believe I could have said it any better.
Focus on arbitrage
By exploiting price differences in identical or similar financial instruments, there is potential to make profits with very small amounts of risk.
Buy businesses at big discounts to their underlying intrinsic value
“The function of the margin of safety is, in essence, that of rendering unnecessary an accurate estimate of the future.” – Ben Graham
Look for low-risk, high-uncertainty business
“Low risk and high uncertainty is a wonderful combination. It leads to severely depressed prices for businesses, especially in the pari-mutuel system based stock market.”
It’s better to be a copycat than an innovator
We know that value investing works. The roadmap has been laid out to us since Security Analysis, all the way to Klarman and Buffett. Why try to fix something that already works?
