🔑 Key Takeaways
- Minimize risk while taking advantage of opportunities by making asymmetric bets that offer more upside than downside. Don't lose money and aim to find bargains in the market for wealth creation.
- By focusing on keeping expenses low and maximizing occupancy rates, the Patels were able to achieve high profitability and success with minimal risk, proving the effectiveness of the Dhandho approach.
- Focus on buying low-risk existing businesses with predictable models, avoid start-ups. Buy distressed businesses with cheap assets at steep discounts. Seek durable competitive advantage or moat. Bet heavily when odds are in your favor. Exploit arbitrage deals for low-risk, high returns.
- Look for unfulfilled demand and connect suppliers to it. Buy businesses at a discount. Invest in proven ideas rather than innovate. Treat stocks as ownership in real businesses. Take advantage of the constant exchange between buyers and sellers.
- Investing in a few businesses with a clear thesis, focusing on durable moats and high returns on invested capital, can lead to wealth-building opportunities. Keep it simple.
- To optimize returns, investors should limit DCF calculations to 10 years or less and focus on highly concentrated portfolios with a handful of bets. Avoid high error rates by not betting too much on one stock and use the Kelly formula for optimal bet sizes.
- Invest in undervalued businesses with a margin of safety, understanding the intrinsic value and being willing to bet heavily. Selling should only occur after thorough research and evaluation of the stock's intrinsic value.
- Take a buy cheap approach to investing by finding metrics that allow quick elimination of companies and selecting metrics that work for your own approach. A three-year time frame can be enough for the market to realize a company's true value.
- Despite volatile revenue and market demand-supply dynamics, Micron's investment in innovation and the oligopoly dynamics of the market signal a positive outlook for chip demand over the next five years. The approaching physical limitations of Moore's law may lead to more stable average selling prices and lower capital expenditure requirements.
- Brookfield Asset Management's diverse portfolio across continents and growing distributable earnings make it a strong long-term investment option.
📝 Podcast Summary
The Dhandho investment strategy for long-term success.
The Dhandho investment strategy involves taking asymmetric bets that offer a disproportionate upside relative to the downside, thus minimizing risk. The approach is to create wealth with minimal risk, and not to lose money, as losing money is not an option. Dhandho investors aim to find bargains in the market by taking advantage of arbitrage opportunities. The Patel family is a great example of immigrants who became successful in the motel industry by taking advantage of the opportunity after a recession. The Dhandho approach to investing is to take advantage of opportunities while minimizing risk, and this approach can be beneficial for long-term investment success.
The Patel Family's Low-Cost Dhandho Approach to High-Profit Motel Business
The Patel family created a competitive advantage by becoming the lowest cost motel operator, resulting in high occupancy rates and profitability. They lived a simple life, spending most of their time working and avoiding recreational activities, which kept their expenses abysmally low. The Dhandho approach they applied had minimal downside, but asymmetric upside, making the venture a low-risk and high-reward investment. With their initial investment of $5,000, the Patels earned a 400% return on their profit and eventually owned 50% of the motel market in the US in 35 years. Mohnish also took a risk in starting his business, but saw little downside and potential for huge success, resulting in a multi-million dollar net worth.
Mohnish Pabrai's Dhandho Framework for Investing: Principles to Follow
Mohnish Pabrai's Dhandho framework outlines nine core principles for investing. One of the essential principles is to focus on buying existing low-risk businesses with a simple, predictable, and non-cyclical business model, rather than investing in start-ups. The framework recommends buying distressed businesses, as it's the best time to get a good deal when the future prospects are uncertain, and there is an opportunity to buy cheap assets at steep discounts. Investors also need to look for businesses with a durable competitive advantage or moat and bet heavily when the odds are in their favor. Focus on arbitrage deals and exploit price differences in two different markets as it is a low-risk play with high returns.
Applying Arbitrage Concepts in Business and Stock Market.
Arbitrage concepts can be applied in business by identifying markets with unfulfilled demand and connecting them with suppliers. When buying a business, ensure a discount to intrinsic value, and look for low-risk, high-uncertainty businesses. It’s better to copy proven ideas than innovate and potentially fail. The stock market offers advantages over purchasing an entire business, such as convenience, control over investment size, and ease of buying and selling. Viewing stocks as ownership in a real business, rather than a piece of paper, helps investors benefit from the cash generated by the company. The market allows for a constant exchange between buyers and sellers, creating opportunities for price discrepancies.
Simplicity in Stock Buying: Advice from Mohnish Pabrai
Simplicity is key when buying stocks according to Mohnish Pabrai, a Dhandho investor. To build wealth, he believes in owning a few businesses with a simple thesis for why you're likely to make a great amount of money and unlikely to lose very much. Markets are largely efficient for most businesses, but inefficiencies can arise due to human psychology. Investing in distressed businesses in distressed industries can lead to potential returns. Identifying durable moats or competitive advantages is crucial when selecting a business to invest in. Return on invested capital is a good indicator of a strong moat. Overall, keep it simple and stick to businesses with potential for high returns on invested capital.
Limiting DCF Calculations and Betting Big on Favorable Odds
Investors should understand that even the greatest businesses eventually enter the phase of decline. Therefore, it is best to limit discounted cash flow calculations to 10 years or less and avoid being too optimistic about the future. Mohnish Pabrai, a Dhandho investor, recommends betting big on companies with highly favorable odds and focusing on highly concentrated portfolios with a handful of bets, like the top three positions, to gain optimal returns. However, individual retail investors should be careful not to bet too much on one stock to avoid high error rates of 40%-50%. When making favorable bets, using the Kelly formula, like Ed Thorpe did to win at blackjack, can determine optimal bet sizes to gain the most profit.
Finding Mispriced Opportunities: The Art of Value Investing
Investing is all about finding mispriced opportunities and betting heavily when the odds are overwhelmingly in your favor. This allows for taming market volatility while running a concentrated portfolio. Warren Buffett's 'Bible of value investing', 'The Intelligent Investor', stressed the importance of having a margin of safety by buying a business for way less than it's conservatively worth. This reduces downside risk and increases returns. Investors wait for periods of distress and extreme pessimism to buy assets below their intrinsic value. Mohnish Pabrai outlines seven criteria that need to be met before purchasing a stock, including understanding the business, intrinsic value, and being willing to invest a large percentage of net worth. Selling a stock is difficult due to the inability to predict the future, but it should be done if there is a high level of certainty that the current intrinsic value is less than the market within the first two or three years of owning it.
Understanding a Company's Intrinsic Value for Accurate Stock Investing
Investing in stocks requires understanding a company's intrinsic value to make accurate decisions. Giving a company three years to converge towards its intrinsic value may be enough time for the market to realize the true value of a business. Mohnish Pabrai takes a buy cheap rather than buy quality approach to investing, buying stocks that are obviously really cheap to him. Finding metrics that allow quick elimination of companies and selecting metrics that work for your own approach is important. Mohnish's portfolio includes two sizable positions in the US in Micron and Brookfield Corporations. Micron is a semiconductor company that is part of the cyclical semiconductor industry, and Mohnish is collaborating with other prominent value investors on this investment.
The Challenges and Opportunities of the Semiconductor Industry
Cyclical businesses like the semiconductor industry can be challenging with excesses leading to market demand-supply dynamics. Micron spends heavily on capital expenditures to innovate better semiconductors and its revenues are volatile, with various up and down cycles. However, Micron's bold case is that the demand for chips will be higher over a period of five years, with the current market being an oligopoly. Oligopoly dynamics show that undercutting each other is not in the interest of each of the three primary players, Samsung, Hynek, and Micron. The physical limitations of Moore's law are approaching, and the slower innovation resulting may lead to more stable average selling prices and lower capital expenditure requirements.
Brookfield Asset Management - A Diverse and Growing Asset Manager
Brookfield Asset Management is a Canadian asset manager with over 700 billion in assets under management, investing in various things such as gas pipelines, toll roads, data centers, solar farms, hydroelectric dams, and skyscrapers across five continents. Brookfield has been a strong outperformer over the years and has the tailwind of more and more capital wanting to invest in alternative assets. They are spinning off 25% of their asset management business into Brookfield Corporation because they believe that the asset management business deserves a higher multiple. Brookfield's growth is expected to continue for the foreseeable future as they project their distributable earnings to grow by over 20% over the next five years, from 3.7 billion to 9.3 billion. With a wide moat and potentially large margin of safety, Brookfield is a great company to own for long-term compound growth.