The basic idea underlying this chapter is that when opportunities exist, it's important to bet big. Pabrai is not an advocat of investing frequently, with amounts of money that won't significantly move the needle. Instead, he suggests disproportionate amounts should be invested when the odds are significantly in one's favour.
To calculate how much an investor should bet on a given opportunity, Pabrai suggests using the Kelly Formula, which he discusses in detail. A major weakness of using this formula, however, is that it requires the payout and odds to be known in advance. This knowledge is available in gambling games (where the Kelly Formula is perhaps more relevant), but stock returns are not calculated with assurance so easily. To better understand how investor's should think about how much to invest in a particular opportunity and why, Pabrai recommends William Poundstone's book, Fortune Formula.
Though the motel-buying Patels described in earlier chapters of the book had likely never heard of the Kelly Formula, Pabrai argues that they nevertheless recognized the fundamental concept behind it, and that's why they were so successful: when a great opportunity presents itself, bet big. Pabrai also analyzes the statements and writings of Warren Buffett and Charlie Munger and concludes that they employ the very same credo. Said Charlie Munger in a speech at the USC business school:
"The wise ones bet heavily when the world offers them that opportunity. They bet big when they have the odds. And the rest of the time, they don’t. It’s just that simple."
And wrote Warren Buffett in his partnership letters from 1964 to 1967:
"We might invest up to 40% of our net worth in a single security under conditions coupling an extremely high probability that our facts and reasoning are correct with a very low probability that anything could change the underlying value of the investment."
In light of the above, Pabrai finds it puzzling that the average mutual fund holds 77 positions, and that the top 10 holdings represent just 25% of assets. Dhandho, on the other hand, as Pabrai describes it, is "about making few bets, big bets, infrequent bets".