In his book – The Dhandho Investor, Mohnish Pabrai explains that Dhandho arbitrage spreads, though temporary, offer valuable investment opportunities. The key question is how long these spreads will last and how wide their moat is.
Quoting Warren Buffett, Pabrai emphasizes the importance of determining a company’s competitive advantage and the durability of that advantage over predicting industry growth. While all arbitrage spreads eventually disappear, investors can still earn substantial returns by evaluating the likely duration and width of the spread.
Dhandho’s strength lies in long-lasting spreads, offering low-risk, high-return opportunities that investors should exploit for maximum gains.
Here’s an excerpt from the book:
We know that all Dhandho arbitrage spreads will eventually disappear. The critical question is: How long is the spread likely to last and how wide is the moat? As stated by Mr. Buffett:
“The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage.”
—Warren Buffett
Everything wears out eventually. Even the seemingly permanent Dhandho arbitrage spreads will eventually vanish. That does not mean we can’t invest and make a decent return. It does mean, however, that we need to have some perspective on whether the spread is likely to last 10 months or 10 years. The wider the spread, the better it is. And the more durable it is, the better it is.
The difference between Dhandho and traditional arbitrage lies mainly in duration and width of the spread. With Dhandho, this spread is likely to last for many years, and the returns an investor can garner by capturing this spread can be enormous.
Always look for arbitrage opportunities. They allow you to earn a high return on invested capital with virtually no risk. Exploit these Dhandho arbitrage spreads for all they are worth.
You can find a copy of the book here:
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