Sunday, September 13, 2009

The Dhandho Investor: Chapter 12

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.

This chapter stresses the importance of only purchasing investments with a healthy margin of safety. Once again, Pabrai quotes Buffett to back up this point:

"Make sure that you are buying a business for way less than you think it is conservatively worth."

Pabrai also refers to the writings of Ben Graham in The Intelligent Investor (which we've summarized here) by pointing out that Graham discussed the following joint benefits of employing a margin of safety: lower downside risk, and higher upside potential.

The entrepreneurs described at the beginning of Pabrai's book had likely never read the writings of Graham. Nevertheless, it is clear to Pabrai that their decisions were always taken with the idea of risk minimization in mind. Business schools, on the other hand, teach that reward comes from risk, and do a great disservice to their students, Pabrai argues.

The idea that higher rewards can only be achieved through higher risk is a common argument made by those who believe that the market is efficient, and therefore that it does no good to look for low-risk, high-reward situations. On this topic, Pabrai quotes Buffett again:

"We are enormously indebted to those academics: what could be more advantageous in an intellectual contest - whether it be bridge, chess, or stock selection than to have opponents who have been taught that thinking is a waste of energy?"

2 comments:

Anonymous said...

Yes I agree with that. Risk is not directly correlated with income or the other way. After years of trawling the net
and books for investment/trading ideas I
came to the following conclusion:
1.Good investors/entereprenuers cover and
minimise every risk. They make conservative decision and protect their
capital.They are good high precision calculators of possible chain of events and do treat business as a hobby.
2.Great traders like Linda Bradford Rashck have repertoire of market techniques and patterns.They trade only
when these patterns can be recognized. They don't jump into markets. They trade
only on a confirmed trend.Irepeat a
confirmed(highly probable) trend
jose francis cochin Indi

Anonymous said...

Yes I agree with that. Risk is not directly correlated with income or the other way. After years of trawling the net
and books for investment/trading ideas I
came to the following conclusion:
1.Good investors/entereprenuers cover and
minimise every risk. They make conservative decision and protect their
capital.They are good high precision calculators of possible chain of events and donot treat business as a hobby.
2.Great traders like Linda Bradford Rashck have repertoire of market techniques and patterns.They trade only
when these patterns can be recognized. They don't jump into markets. They trade
only on a confirmed trend.Irepeat a
confirmed(highly probable) trend
jose francis cochin India

Follow by Email