The Dhandho Investor book has many valuable lessons on how to build your Balance Sheet and Mohnish Pabrai describes the Dhandho investment approach which essentially creates wealth in a manner that minimizes risk and maximize rewards or simply put – when tossing a coin you would like to be in the following situation “Heads I win:tails I don’t loose too much”
Mohnish who has had dinner with Warren Buffett describes the Patel family who built their wealth from virtually nothing to owing about $40 billion in hotel assets
The following principles come from the book
- Invest in existing businesses
Try and invest in existing well defined businesses with a long history of operations as this is less risky thans investing in startups
2. Invest in simple businesses
Invest in businesses that do not change – look for mundane products that everyone needs
3. Invest in distressed businesses in distressed industries
When buying in a distressed environment you are getting a bargain – to quote from Buffett; “Be fearful when others are greedy. Be greedy when others are fearful”
4. Invest in businesses with durable moats
Invest in businesses that have an durable competitive advantage – for example a business can have a moat which is a low cost advantage – this is what Buffett has with his insurance business
5. Few bets, big bets, in frequent bets
This means that when you do invest – then invest heavily when the odds are in your favor- so you you need to know how to value stocks to discover a mispriced stock – this is value investing
6. Fixate on arbitrage
Arbitrage is defined as profiting from price differences in similar or identical financial instruments- Richard Branson does this – he gets into a market to offer innovative offerings and eventually the competition catches up and the moat shrinks and arbitrage spread collapses
7. Margin of safety always
This means that you need to buy businesses at big discounts to their underlying intrinsic value – so if you buy at a discount you will be protected against large downsides
8. Invest in low risk high uncertainty businesses
This is what the Patel family did when they bought into the motel industry – not much risk but high uncertainty – this environment leads to depressed prices – so Dhandho entrepreneurs first focus on on minimizing risk
9. Invest in copycats rather than inovators
Innovation in most cases innovation is a crap shoot (something that could produce a good or bad result) – but lifting and scaling carries lower risk and decent to great rewards
There were 3 final chapters which go into more detail regarding investing so I will not cover them here