Saturday, August 15, 2009

The Dhandho Investor: Chapter 2

Mohnish Pabrai is an Indian-American businessman and investor. For a number of years, he turned heads with the performance of Pabrai Investment Funds since its inception in 1999. Pabrai has high regards for Warren Buffett and admits that his investment style is copied from Buffett and others. Over the next few weeks, we'll be exploring the topics in his book about value investing.

To dispel the idea that the story described in Chapter 1 was simply a matter of fortunate timing and luck, Pabrai describes another successful entrepreneurial venture where the risks were low but the potential upside was high. The story is that of Manilal Patel, a man who immigrated as an accountant, but could not land a job due to his broken English.

For several years Manilal worked for minimum wage, slowly building wealth while biding his time and searching for a business to own and run. For twenty years he worked nearly around the clock and began to invest in residential real-estate. After September 11th, however, he would get the break he was waiting for. Travel was down, and the hotel market was suffering once again. Manilal was able to take advantage by finding some partners and putting much of his own capital towards the purchase of a Best Western hotel. The hotel required a downpayment of $1.4 million, which Manilal borrowed against his house to help fund.

Pabrai goes into further detail about various scenarios of the hotels return's. But the lessons Pabrai is attempting to illustrate are clear:

1) When a terrific investment opportunity is available, a bigger investment should be made. As Pabrai calls it: "Few bets, big bets, infrequent bets".

2) Participate in investment opportunities that have minimal downside risk but high upside potential: "Heads, I win; Tails, I don't lose much."


Anonymous said...

This doesn't make much sense to me.. the guy put up his house to buy a hotel.. there are numerous entrepreneurs who engage in similar, or even higher levels of risk taking.. there's always a finite probability of success in such a venture and it appears he was successful..

Secondly, the phrase he's throwing around is nothing other than the principle of risk-adjusted returns, so nothing new there..

He seems to be advocating leveraged risk-taking, which is fine in moderation, but sends the wrong signal when you put your own home on the bargaining table

Saj Karsan said...

Hi Anon,

You're right that putting your house up to buy a business doesn't sound like a low-risk venture. In the book, Pabrai does take some time to discuss why the hotel still offered excellent returns versus the risk involved.

Ninad Kunder said...

I dont think Pabrai is necessarily talking about taking leveraged risks though this example might seem so.

The theme is to make fewer bets and bet big whenever u come across a great opportunity. Like Buffett's Amex bet where he put nearly 40% of the partnerships portfolio on a single stock.