Sep 9, 2012

No Mean Sum Book Review – The Dhandho Investor

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Dhandho!

I recently stumbled upon a video of Monish Pabrai and Guy Spier speaking to students at UC Davis, and so enjoyed both the content and clarity of thought that, although I promised myself I wouldn’t read any more value investing books until I finished Security Analysis, one Sunday morning I picked up The Dhandho Investor by Monish Pabrai and finished it soon after.

First and foremost, the book is not an academic treatise on how to value companies; it’s an overview of a philosophy of investment. If you come into it thinking you’re reading a new Security Analysis or This Time is Different, you are sure to be disappointed.

For those who don’t know, Monish Pabrai is a successful Indian tech entrepreneur turned investment partnership manager with an unabashed admiration for the work of Buffet and Munger. It follows that Dhandho is, roughly speaking, the Indian word for value investing. Mr. Pabrai begins the book with a series of anecdotes describing how various entrepreneurs have put the Dhandho philosophy into practice outside of the securities markets. For some, the repeated anecdotes will be redundant, but for me it served as a reminder how value investing transcends the work done by hedge funds and others in public securities markets. Also, I think that exposing how value investing is successful in the real world is an elegant means of acclimating newcomers to the tenets of value investing.

In what could be called the second half of the book, Mr. Pabrai delves into some of the qualities that make an investment a Dhandho one. Anyone familiar with the works of Graham, Buffet and Munger will recognize the concepts discussed here, margin of safety, durable moats, infrequent large bets, etc.  That being said, the author would be the first to admit that most of his investment philosophy is derived from the works of these great men. In fact, Mr. Pabrai has gone so far as clone the fee structure of the original investment partnership for his own Pabrai funds.  Mostly these chapters stay light on the mechanics of investing and instead they focus on reiterating how the investment examples of earlier chapters conform to the Dhandho methodology.

For me, the most interesting chapter in terms of new theoretical material was Abimanyu’s Dilemma – The Art of Selling, in which Mr. Pabari attempts to tackle the issue of when to sell a security. Personally, I think the book is worth buying for this chapter alone since, to my knowledge, very few other texts give any sort of guidance on this facet of investing. Mr. Pabrai comes away recommending that we wait two to three years for a security to trade at 90% or more of our intrinsic value estimate before selling. He arrives at this time horizon on the basis that real business change takes time, and if we are comfortable buying, we should be comfortable holding until said change is actualized or the market takes notice of the mispricing.

While I’m not entirely convinced of this methodology, his prescription gave me cause to reflect on my own investment habits. In doing so, I realized that whenever I buy a security solely on the basis of someone else’s bullish opinion, I tend to just sit there and watch the price instead of focusing on the underlying business and because of this, I get impatient and either sell it too early or soon after I’ve taken a loss. Mr. Pabrai’s book made me realize that buying a stock without having an idea of what you think it’s worth is like setting out to sea without a destination; at the first hint of adversity you will likely abandon ship and even if you encounter fairer conditions, you are still merely adrift without a destination in mind. To put it another way, it’s hard enough to be rational about my own conclusions; to act intelligently on the opinions of others is damn near impossible.

One thing I was hoping to find in The Dhandho Investor was more insight into Mr. Pabrai’s use of checklists. In Atul Gawande’s excellent book, The Checklist Manifesto, he discusses the use of checklists in the investment profession and Mr. Pabrai is one of two investment managers who profess to use checklists in order to better navigate the complexity of making investment decisions. To my disappointment, Mr. Pabrai never discusses his use of checklists in the Dhandho investor.  Having said that, a quick Google search yielded the following results:

Pabrai’s  on Checklists

Interview with Steve Forbes on Checklists

Atul Gawande Article on Value Investor’s Checklists

But still, I wish there was more from the horse’s mouth so to speak, maybe even an abbreviated checklist if it’s not too proprietary. Perhaps in the next book Mr. Pabrai?

Overall, I believe I benefited from reading the Dhandho Investor. Though it may not been ground breaking in terms of content, for me at least, the presentation helped reinforce lessons that are too important to forget. From another perspective, if there were one book I would recommend giving to a family member about value investing this might be it. Yes, the Intelligent Investor may be more comprehensive but the Dhandho investor is enjoyable and intuitive, and if I’m making a bet on which book is more likely to be finished and retained, I’m getting long Pabrai.

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Aug 31, 2012

John Maynard Keynes – The Once and Future Value Investor

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Imagine if you will, that when you were 26 you quit your job at the Treasury to write a book predicting how the terms of peace would cause economic and social disaster, even war, and all of it came true. Then you sat down and wrote the book that more or less began the discipline […]

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Aug 16, 2012

ENGILITY (EGL): What About this Spinoff Makes a Baupost Alum Buy 11%?

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[youtube http://www.youtube.com/watch?v=01-2pNCZiNk&w=420&h=315] Overview: On July 28th 2011 L3 communications (LLL), a major military contractor announced its intention to spinoff a number of its business units into a new company, Engility Holdings Inc. (EGL). On July 17th 2012 the spinoff was completed and Engility and began trading as a separate entity. The company faces significant headwinds […]

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