In his book – The Dhando Investor, Mohnish Pabrai advocates investing like playing blackjack – bet heavily when the odds are overwhelmingly in your favor. His “Dhandho” approach involves finding a temporarily distressed but good business with a durable moat, within your circle of competence.
Determine its intrinsic value 2-3 years out, and if the current stock price is less than half that value, invest aggressively for near-certain profits. Pabrai treats this as a law of investing – underpriced businesses will eventually trade at intrinsic value, and the Kelly Formula guides position sizing.
Here’s an excerpt from the book:
In investing, there is no such thing as a sure bet. Even the most blue-chip business on the planet has a probability of not being in business tomorrow. Investing is all about the odds—just like blackjack.
Thorp is the most vivid example of a human who has mastered these concepts fully. He has repeatedly played the odds on the Strip and Wall Street over the decades and won handsomely on both fronts—creating a huge fortune for himself and his investors.
When an investor approaches the equity markets, it has to be with the same mind-set that Thorp had when he played blackjack: if the odds are overwhelmingly in your favor, bet heavily.
Let’s assume that you have adopted the Dhandho framework and have found an existing publicly traded company with a simple business model. Further, it happens to be a business under temporary distress, and this has led to a collapse in its stock price.
The best part—it’s a good business with a durable moat. The business is squarely within your circle of competence, and you’ve figured out its intrinsic value today and two to three years out. You’ve found that the current stock price is less than half of the expected intrinsic value in two to three years.
If you invest in any under-or overpriced business, it will eventually trade around its intrinsic value—leading to an appropriate profit or loss. We can pretty much treat this as a law of investing and hang our hat on it. Thus, if we can determine the intrinsic value of a given business two to three years out and can acquire a stake in that business at a deep discount to its value, profits are all but assured. In determining the amount to bet, the Kelly Formula is a useful guide.
You can find a copy of the book here:
Mohnish Pabrai – The Dhando Investor
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