This book deals with how individuals can make better investments, particularly in stocks, through so-called value-based stock picking. This book is a classic, and thus deserves to be carefully read, even though there are some 13 years since it was published. There are also two other classic books on successful stock investing that stand out, namely, Joel Greenblatt’s The Little Book That Still Beats the Market and David F. Svensen’s Unconventional Success: A Fundamental Approach to Personal Investment. I shall review each of these classics also, over the coming few months, for the members of the Lorange Network.
But first to The Dhando Investor. The author is the managing partner of Pabrai Investment Funds, which has delivered exceptional returns to its investors for many years. His mantra seems to be to practice investing in quite a similar style to gambling: “Heads, I win; tails, I don’t lose much”. So, it is a matter of picking investments when cycles are down, and those investments should be relatively “safe” and not involve the spending of too much cash. This implies low risk, and while the uncertainty might be high then there should be clear limits to what one might lose. While the author does not discuss shipping (except for a section on Frederickson’s Frontline in chapter 13), there are typically opportunities to recoup much of one’s investments in ships through scrapping, and sale of the steel, in case the uncertainties of shipping’s freight market may not pan out!
The author also makes the point very early on, that investments should be concentrated, not spread out. To have basically a good understanding is critical! To be disciplined regarding one’s cash is key! Reinvest all free cash as you grow, so as to minimize dilution. So, to try and assess an asset’s future potential is important! This is hard enough when it comes to most stocks, hence, stick to relatively simple stocks, where one might expect good upside.
The author points out that it is important with a defendable advantage, he labels this a “moot”! But such moots tend to disappear over time.
As already mentioned, the author sees investing just like gambling. Thus, make only a few bets; when the odds are good, and the value is down, but make these bets high, and accept that such betting situations will typically only take place infrequently.
One particularly attractive investment option for investors is to look for so-called arbitrage advantages. Again, such advantages shall typically last for only a short time. Traditional commodity arbitrage typically comes to mind, but the author also discusses three other types, namely, correlated stocks, mergers as well as Dhando spreads.
For all so-called Dhando investments (low risk/high returns) there is notion of a high margin of safety. The author points out that this, of course, is contrary to the commonly accepted dictum, that high risk and high returns typically go together. The attractiveness of the so-called Dhando approach is exactly that this common convention does not always hold!
So, how is this done? How are such Dhando investment opportunities found? The author is not very clear on this, except for looking for undervalued stocks or other opportunities and unloading some of this when the market/the valuation hopefully goes up, so that some of these investments can be off-loaded, i.e., a “free ticket” for the remaining holding. One should go for low risk when investing, so that assets might be stripped off, for instance, but accept that uncertainty may be high, i.e., when and whether the market goes up or not. One must not mix these two concepts: risk has to do with whether there is a “safety cushion”, while uncertainty has to do with future accruals in the value of the object that one has invested in. And, as said, go for low risk, high uncertainty.
To invest in good concepts, i.e., cloning, rather than in innovations often seems to be associated with the above dictum. To scale good concepts more often seems to meet the Dhando criteria, the author claims, i.e., ignore innovations! To look at businesses that have been hit hard, for one reason of other, might be good. And there should be relatively small teams of executives doing all of this. So-called “Polish Parliaments” may typically lead to inaction.
We might now be approaching the exiting stage. Clear plans for this may ideally have been made already at the time of investing. And one should not despair in case of an immediate (latent) loss but hold one’s investment up to three years before selling. While this time limit clearing is arbitrary, there tends to be an element of truth to the concept of keeping an asset over some time: it almost always comes back! If you have good alternative investments on hand, you may of course sell before, to free up cash. But the general rule is “wait and see”, do not sell at a loss!
The author points out that to have a relatively good knowledge regarding the underlying facts of one’s various investments shall typically be good, i.e., to know a lot about what one owns. To own more than five to ten value stocks, for instance, may be difficult.
In the end, to follow some sense of indexing might be key, but to try to identify fund managers who might have a good track record in picking value stocks, so that indeed stock picking takes place. To diversify one’s portfolio might call for finding good index funds for venture investments as well as the investment in bonds in addition.
The author offers several closing recommendations. Most of these have already been covered earlier in this book. But two additional recommendations resound with this reviewer:
Fixate solely on analyzing one singular investment at a time. Most investors fail here, in that they might look at several investments in parallel, thus perhaps becoming too “shallow”. As the author has pointed out, to only invest in relatively simple, well-understood business is key!
Do not be afraid to aggressively leverage a particular business that might fit the Dhando criteria. Go as heavily as possible into relatively few investments.
In general, this book is very much to the point. In particular to look for undervalued assets that might have a reasonable upside potential seems critical. To emphasize the “degree of safety” associated with such assets, such as for instance, abilities to spin off parts of underlying businesses also seems key. The reviewer highly recommends this classic!
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