Book Review: The Dhandho Investor by Monish Pabrai

Many people consider Monish Pabrai to be the intellectual heir to Warren Buffett, and I'm a great admirer of his work. His hedge fund, Pabrai Investment Funds, has delivered annualized returns of over 28% after expenses since its inception in 1999. Modelled after the original Buffett Partnerships, Pabrai is one of the great "deep-value" investors, and The Dhandho Investor: The Low-Risk Value Method to High Returns is all about finding bets that are (as Pabrai says about 40 times throughout the book) "Heads I win, tails I don't lose much!"

Dhandho, a Gujarati word derived from Sanskrit, is literally translated as "endeavors that create wealth" and Pabrai encourages investors to invest like the Patels (Asian Indians from southern Gujarat -- 1 in 500 Americans is a Patel) did to gain ownership of more than half of the hotels throughout the United States: Seek out investment opportunities that offer high-upside with little-risk. Pabrai also characterizes other great entrepreneurs as Dhandho investors. The most interesting chapter of the book is the one on Richard Branson's exploits.

The key concept to glean from this book is the difference between uncertainty and risk. According to Pabrai, most investors don't understand the difference. Risk means the chance of a loss of capital. Uncertainty is the range of different outcomes. So a stock may have high uncertainty but may not be risky, if no one knows what will happen but the worst case scenario would not results in a huge loss. According to Pabrai, these investments provide the greatest opportunities for investors.

The Dhandho Investor is pretty lean for an investment book --183 pages with fairly large type. Consequently, it's short on specifics. You won't really learn about how to analyze stocks. But that's fine. There are hundreds of books for that. But Monish Pabrai has presented a compelling way of looking at investing and decision-making in general, and reading this book will likely benefit any investor.