Why Gujarati’s are so rich? : The Dhandho Investor by Mohnish Pabrai

In the 1970s, a small ethnic group from India named the Patels from the same state of Gujarat, first began arriving in the United States as poorly educated people with no money to their name. Today, this small sub-part of Indians makes up only about 0.1% of the U.S. population but has ended up owning well over 50% of all U.S. motel assets worth well over $50 billion. 4 out of the top 5 richest people in India belong to Gujarat, a state on the western borders of the country. How do these Gujarati s do it? The answer is Dhandho. Dhandho is a Gujarati word, the literally means business, but to them its not just a simple word but a framework for investing in places to get high returns, with very low risk. This framework is embedded deep in their veins of this Indian community. One of the most common jargon heard in investing is the pathway to get high returns is to take higher risk. Dhandho Investing is exactly opposite, Dhandho is an approach to investing whose central concept is low risk high returns, instead of infamours high risk high returns. Its all about to participate in the coin toss outcome where heads: I win.

Tails: I don t loose much. Lets see what we as a value investors can learn from the Dhandho framework. This is the better investor, helping you achieve your financial goals and freedom, throuogh organising your finance, stock market investing, and learning from billionaires, and these are top five lessons from the book, The Dhandho investor, written by Mohnish Pabrai Lesson number 1: The circle of competence: We as a human beings cannot know everything about everything, but we surely have fair amount of knowledge regarding few things.

No one knows this better than Gujaratis. They only step foot in the business about which they have knowledge about. If a business opportunity knocks on their door, they try to understand it, If they cannot, they give it a pass. There is no shame. Rahul Dravid a veteran cricket batsmen has highest of the averages. Once asked how does he achieve it, his answer was, the bowlers are really skillful he really does not understand how can he strike everyball that is thrown at him, by these highly skilled bowlers. Thus he gives those balls a pass, but when once in many times, a loose ball presents itself to him, abiut which he is sure he can strike, that is the only time he strikes it. Even the worlds greatest investor warren buffet says that he cannot understand 99% of the businesses Without a doubt that is the very first screen anyone in investing must have, if you cannot in simple language explain what is the product that company sells in order to make money, what are the utilities of the product,.

You have no business to dip your finger to even test the waters. Warren buffet says, that the size of your circle of competence is not so important, but knowing its boundaries are. The very first question you must ask yourself when someone present you a business idea is. Do I really understand how this business is run? If your answer is a NO, don t strain your head and walk ahead. Lesson number 2: Invest in copycats, than inventors The first few Patels who figured out the wonderful motel ownership business economics in the United States were the trailblazers. The thousands upon thousands of Patels who simply copied the model did not innovate; they simply lifted a proven idea and scaled it One of the most common things among four of these top 5 richest Indian is that of them are copy cats, and none them inventors. They improvised what was already a proven business and made their money on it. None of them owns a space station, or has revolutionized the world, all they have done is cloned.

Mukesh Ambani, exploded because of Reliance Jio, When Jio came, there were already plenty of telecom giants in India, Jio just came in and made few tweaks in its offerings Adani his main business is in construction of waterports, airports and infrastructure, just when all the infrastructure companies were going through bankruptcies in India, Adani came in and scaled up his projects and construction bids Mr Uday Kotak, is CEO of Kotak Mahindra Bank, It was before a brokerage firm, dealing in selling and buying shares, Seeing the initial success of HDFC bank, ICICI bank and Axis Bank, He thought he could do well in lending business, he stepped in Mr Radhakishan Damani, started a brick and mortar retail chain called D mart. When there were already of the likes of Big Bazaar, Pantaloons, Amartex in India Other example : Ray Kroc loved the business model of the McDonald brothers hamburger restaurant in San Bernadino, California.

In 1954, he bought the rights to the name and know-how, and he scaled it, with minimal change. Many of the subsequent changes or innovations did not come from within the company with its formidable resources they came from street-smart franchisees and competitors and then scaled up to be included in national and international menus. The company was smart enough to adopt them, just as they adopted the entire concept at the outset. Some of these innovations include: Ronald McDonald was inspired/created by a Washington, D.C., franchisee (1963). The Filet-o-Fish was developed by a Cincinnati franchisee (1963) The Big-Mac was developed by a Pittsburgh franchisee (1968). The Egg McMuffin was developed by a Santa Barbara franchisee (1973).

The drive-thru was first introduced by an Arizona franchisee (1975) The Mighty Kids Meal was lifted from Burger King (2001). As Mohnish says Innovation is a crapshoot, but investing in businesses that are simply good copycats and adopting innovations created elsewhere rules the world. Lesson number 3: Industries with rapid change are bad for investors: The big money in investing is made by holding companies in portfolio which perform better than average and that too for a long period of time.

Time is the most important factor when it comes to compounding money. A company may have reported super normal profit ,may be due to one single event, but from an investment perspective it is of no benefit to you, if it cannot replicate the performance on a continuous basis. Thus it is prudent that for a company to do better than average for a very long period of time, its inherent business must not change much. Warren Buffet says We see change as the enemy of investments . . . so we look for the absence of change. We don t like to lose money. Capitalism is pretty brutal. We look for mundane products that everyone needs From a judgement perspective, it is difficult to judge that what will be the businesses which are likely to last for next 50 years, but easier to judge what will not. It is highly likely that we are still going to eat rice, smoke cigarettes and drink coke fifty years from now, but it is very difficult to judge whether people will be using facebook and watching Netflix fifty years from now. The real dhandho does not set his foot in such a place.

Since Dhandho is all about investing only when odds are highly in your favor. Investing in a business which rapidly changes itself means stepping in a place where odds are already against you. Which is not a Dhandho way of investing Lesson number 4: High risk vs high uncertainity The market most of the times, confuse risk with uncertainity. And as a Dhandho you can benefit immensely from this confusion. The market participants hate uncertainity and it demonstrates that hate by collapsing the quoted stock price of the underlying business. Here are the likely reason that are going to lead to a distressed stock price. High risk and low uncertainity. High risk, high uncertainity And last, Low risk high uncertainity The fourth logical combination which is low risk and low uncertainity is loved by the market participants and stock prices of such companies are quoted at very expensive multiples in st0ock market.

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Mohnish says to avoid investing in such rosy businesses. The Dhandho would want to avoid all possible combination and solely focus on investing in one type, that is Low risk and high uncertainity, which gives us most sought after coin toss odds, heads I win, tails I don t loose much. Such opportunities most of the times arrive in distressed times. For eg: a FSSAI food regulating authority of india banned Maggi noodles in April 2015 after its tests found excess lead in noodle samples. The company had to remove Maggi packs, all 35,000 tons of the product, from store shelves.

Taking a hit of 450 crore from its profits. There was an uncertainity in the market as to how long was this going to continue. In real only 2o% of their revenue came from the sale of noodles. Worst come worst the Noddles brand would shut and nestle would take a hit of 20% on its revenues, but In a sane mind it was easy to assume that even if the courst baned the noodles a little longer and the acquisitions were true, they could just reduce the lead content and continue with their daily operation. In reality the uncertainity as to how long this dispute is going to take to resolve and how long will it effect the profits of the company and such things lead the makret participants to exit and stock price to tank, In reality there was no risk involved in this trade, sooner or later the maggie would be back in shelf with their low lead noodles and things would go on normally. These are the situation that Dhandho sees. In 2014 the telecom players in india were having a cut throat cometetion, before Relaice Jio stepped in with their revolutionary call plans of extremely cheap internet plans.

There was high uncertainity in the Mind of Mukesh Ambani if their operations would succeed and will people would be willing to switch to their telecom service, Worst come worst Jio would loose all the money and be just like any other telecom company having no growth in their revenues, Even considering that scenario, until that time Reliances most of the revenue was comng from Petrcochemical business and almost nothing from telecom, even if the telco operations went bust, Jio could go back and focus on thei Petro chem business which was already profitable. Heads : Reliance wins, Tails Reliance does not loose much Lesson number five, Few bets, better bets, bigger bets. Since the low risk, high uncertainity dhandho situations are very few and show up occasionaly, thus Mohnish says few bets. It is not a Dhandho way of investing to be a part of every party in the town. Only when such a situation shows up he would stake his money, rest of the time, he would just be searching for them.

Better bets means, choosing only those bets which have a favourable outcome to you of Heads I win tails, I don t loos much. Thus it is prudent that when putting our money into these highly favourable outcome situation, we invest big amount of money. If we invest too little then that would hardly move a needle. Investing is almost like gambling, there is hardly an opportunity where you have 100 percent chances for an outcome to happen. The chances of you loosing can be as low as 10 percent but these would always be there, Thus a Dhandho does not put every penny of his wealth depending on one outcome, because of that unfourtunate 10 percent happens he would not survive, but a Dhandho definitely put a sizeable amount of capital when he finds such situations where the downside is very less as compared to the upside. More on this in the takeaway no. 5 from my last video Concentrated investing. Which you can check out. All the grat Dhandho Investors na dall the wealthies people who created their fortune, have done it because of a very few ultra successful investments.

Warren Buffet Made it through American Express and Coke Rakesh jhunjhunwala made it through Titan and Crisil Billgates through Microsoft and Disney. Lakshmi Niwas Mittal through his operations in steel industry. Vijay Kedia through Atul Auto and Sudarshan Chemicals. These people would not have been where they are had they not capitalised big on the best of their ideas. Lets have a quick reacap: 1. The Dhandho investor only invests in simple, well understood businesses. That requirement alone likely eliminates 99 percent of possible investment opportunities.

We must remain squarely in our circle of competence and not even be aware of all the noise outside the circle. Within the circle, read pertinent books, publications, company reports, industry periodicals, and so on. 2. Copycats do not depend on one single outstanding idea to drive their business, they just go onto improvise an already well established idea, product and then scale it up. While inventions when done right give huge payoff to those who invest in them early but their risk of completely going bust is also high, which is not where dhandho wants to invest.

Dhandho would invest in business that is good at copying and improvising an existing business than to put his money in copycats 3. Wealth creation involves consistent outperformance for a long period of time, For a business to do well for very long, it must be in an industry where the rate of change is very slow or not at all rather than rapid. 4. Market most of the time confuses situation of high uncertainity as high risky and smashes the stock price of such business. This is the best time for Dhandho to step in and benefit from this behaviour of market participants. Dhandho would look for opportunites of low risk but high uncertainity. 5. When an opportunity comes to where the coin toss odds in your invetsing are heads I win tails I don t loose much, you must not invest a small amount which barely moves a needle for your wealth but invest big amount.

But treat this with caution, not investment opportunity has 100percent chances of success rate, thus one can never put all its money in just one investment idea. The amount of money you invest in a business smust be directly proportional to the probability of its success.

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