DHANDHO – Investment Primer

Of all the books that i have read and re-read Dhandho is probably the best for a primer on investing. It goes beyond the numbers and hits at basic investing logic. With time these principals will be fine tuned and complicated 🙂 but just sticking to this too will yield you enormous confidence in your investment decisions

• Dhandho is about endeavours that create wealth by taking virtually NO RISK.
• Take series of bets that are virtually risk free and have the potential of outsized returns, the results will be outstanding.
• Heads i win, tails i don’t loose much.
• Few bets, Big bets, Infrequent bets.
• Getting dollar bills for 10 cents is Dhandho on steroids
• Marwaris want investments to be returned in the form of divided in no more than 3 years. i.e double in 3 years.
• You will end up saying no way more often that saying yes.

Principle 1: Existing Businesses

Buy a business with a well defined business model.

Buy business will a long history of operations.

Principle 2 : Simple Business with Ultra Low Levels of Change

Change is the enemy of investments.

Get into mundane products that everybody needs.

Look for large gaps in intrinsic value and market value.

Compare this with the cash that the company is generating.

If your investment thesis in a company is > 1 paragraph. Dont BUY.

If you need to fire up and excel for calculations, don’t buy !

Smart < Intelligent < Brilliant < Genius < Simple 

Principle 3 : Distressed businesses in Distressed Industries.

Don’t count on making  a great sale. Make sure that the purchase price is so attractive enough.

Take bets in good companies with Pathetic near term prospects.

Humans are subject to extreme fear and extreme greed. Take advantage of that.

Narrow your universe down to businesses that you like and can understand and are in a distressed state.

P/E < 5-7

Principle 4 : The MOAT

High ROCE > 30%

There is no such thing as a permanent moat.

Principle 5 : Big Bets

Take big bets when odds are overwhelmingly in your favour.

Horse races with 50% chances that are paying 3:1

To be a good capital allocated, you always have to think probabilistically.

Invert, always invert.

Take a big bet when opportunity is gleaming in your face, rest of the time go play golf or something.

Principle 6 : Margin of Safety

Higher the discount to intrinsic value, higher the return and lower the risk.

Minimise downside risk before looking at the upside potential.

Look at close investment gaps in 3 years or less.

Only in distress does rationality go out of the window.

Principle 7 : Low risk, High Uncertainty – Most Important

Look for investments with a very wide range of possibilities.

Odds of permanent loss of capital should be very low.

The business should require very little capital investment.

Risk NOT EQUAL TO uncertainty.

How many times Cash flow is the company taking at ?

Do not get scared if the company has Debt but at the same has spare assets to sell.

Reverse engineer – Always

When the company itself can’t be sure of what it will make, it is awesome as it confuses the hell out of the analysts on Dalal Street.

Read voraciously – Wait patiently.

Principle 8 : Copycat > Innovator

Innovation is crapshoot, but lifting and scaling carries for lower risk and has decent to great rewards.

Other awesome advice 

Independence of thought is fundamental for sound investing.

Have 80% of your bets in a concentrated portfolio and 20% as a punter portfolio.

Invest only into those ideas that you have personally researched.

Do not look for a consensus on your investments.

Value investment is fundamentally contrarian in nature. the best opportunities generally lie  in those that have been hit hard by negativity.

Look for hairy, hated, unloved awesome businesses.

Ignore the innovators, look for the ones that can LIFT and SCALE.

Never research >1 business at the same time.

On Selling

Selling is usually more difficult that buying.

When you know exactly why you are buying, selling becomes that much easier.

Have a crystal clear exit plan even before buying the stock.

Dont sell a stock within 2-3 of buying unless you can say with a high degree of conviction that the current intrinsic value is way less than what the market is offering.

Business valuation can go through dramatic changes in minutes, whereas real businesses take months to change.

Be very reluctant to take permanent loss of capital.

Most fortunes have been made owning a single wonderful business. If you understand and own these type, you do not have to own too many of them.

5-10 diverse, well understood value stocks, is enough to compound wealth for long intervals of time.