Nobody likes sober messages when the Sensex is hurtling from one high to another, and an eager crowd cheerily goads the index on for the ascent to the next K.
But Mohnish Pabrai, Managing Partner of the US-based Pabrai Investment Funds (www.pabraifunds.com), is different. He sombrely observes, “Currently the Indian market is overridden with greed and there isn’t much fear. The Sensex is up over 5x in four years.”
Pabrai is the author of ‘The Dhandho Investor’ (Wiley, 2007), a book that distils ‘the Dhandho capital allocation framework of the business savvy Patels from India’ and guides the intelligent individual investor in applying the framework successfully to the stock market. For starters, ‘dhandho’ (pronounced dhun-doe), literally translated, means ‘endeavours that create wealth,’ says Pabrai. The Hindi word ‘dhanda’, as you may know, means ‘business’.
In his line of business as an investor, Pabrai has been more than successful. Since inception in 1999 with $1 million, Pabrai Investment Funds has grown to over $400 million in assets under management, as a page on www.valueinvestingcongress.com informs. If $1,00,000 had been invested at inception, it would have been worth $7,88,100 as of June 30, 2007 – an annualised return of 29.4 per cent net to investors, versus just a little more than 4 per cent for the Dow.
“According to Smith Barney data that is derived from Lipper’s mutual fund database, the fund’s overall performance ranks No. 3 out of some 4,000 mutual funds, behind only the BlackRock Global Resources Fund, at 29.5 per cent, and the ING Russia Fund, at 38.4 per cent,” writes Sham Gad in an article dated October 4 on www.fool.com.
“Taking out Pabrai’s fees -- average fund expenses are a small 8 basis points -- and his performance cut, his fund would have been No. 2 on the list.” Gad’s story opens with how in Chicago, “a big crowd -- perhaps the largest yet -- came out to hear value investor and Warren Buffett disciple Mohnish Pabrai” at his company’s annual shareholders’ meeting.
An ardent disciple, he definitely is. In July this year, Pabrai bid $6,50,100 on eBay to have lunch with Berkshire Hathaway Chairman Buffett. “My guru is Mr Buffett and I have only taken from him so far and have never given back. This lunch is the only meaningful way that I can give back to Mr Buffett,” Pabrai commented.
“The guru dakshana remains mostly unpaid, but I’m excited about having made a dent in the right direction. Having 2-3 hours of Mr Buffett’s undivided attention is priceless and I can hardly wait to break bread with the messiah.” All the auction proceeds were for the Glide Foundation (www.glide.org), a non-profit group in San Francisco's that helps serve poor and homeless people.
The spirit of ‘giving back’ is what Pabrai and his wife Harina Kapoor gave form to by starting The Dakshana Foundation (www.dakshana.org) not long ago. Its primary focus is “on funding gifted, rural and impoverished kids to undergo 2-years of world-class coaching before taking the entrance test for admission to the Indian Institute of Technology (IIT).”
We do not believe we can solve the problems of the world, says a pragmatic Pabrai. “We do, however, believe that we can make a small dent if we approach charitable giveback with a laser-focus and a business mindset.”
His inspiration is Ramanujan School of Mathematics in Patna, Bihar, founded in 2003 by “Anand Kumar, 33, a local mathematician, and Abhayanand, 52, Patna’s deputy director general of police and a lover of physics,” as www.businessweek.com reported in an August 2006 article.
The school scours ‘Bihar’s least privileged communities for 30 bright students’; provides them with free lessons and housing; and the students, called ‘Super 30’ appear for the intensely competitive IIT entrance exam. “In the first year, 16 of the group made it into the IITs. The next year, 22 made it…”
The ROI (return on invested capital) of the Ramanujan School of Mathematics is simply off the charts, commends Pabrai in his January 2007 letter on www.dakshana.org. “If you take a kid who might not even go to college and instead get him accepted to attend India’s elite IITs, his value to society rises exponentially,” he argues. “During the months that Ramanujan tutors him or her, they likely spend under $1,000 on this student. The income enhancement over that individual’s lifetime is likely several million dollars. Investing $1,000 and getting a payback of several million over 50+ years is a very compelling proposition.”
Alas, such healthy returns may seem too remote to look for in the Indian stock markets, which are currently turbo-charged. But Pabrai reassures. “Even in overvalued markets, there is value to be found,” he says, interacting recently with Business Line over the e-mail. “Look for the hated, the unloved and the distressed business.”
Excerpts from the interview.
What prompted you to write a book on Dhandho techniques?
I wrote the book mainly to crystallise the Dhandho investing framework in my own mind. Putting it in book form was very useful. Plus I thought individual investors could benefit from reading it as well.
What was the response you got from readers, especially in the West, to ‘Dhandho’?
The book has done vastly better than I would have predicted. US sales have been very good. My editors were deeply sceptical about a non-English word being the core of the title. And it’s a word even most Indians have never heard of. I liked the title and pushed them to take a chance and go with it. It seems to have resonated well with mainstream value investors in the west.
What was surprising to me was the book’s appeal to readers in a variety of Asian countries. ‘The Dhandho Investor’ is being translated into a number of languages and will soon be available in Chinese, Korean and Thai. No Gujarati edition planned yet.
And, how did the Patels receive the idea?
I have heard from a number of Patels and the general feedback has been that they have all enjoyed the book. The book probably does not teach the typical Patel much. It is all so obvious to them.
How long does it normally take for an average person to master these techniques?
The “techniques” are painfully obvious. The only proven way to beat the markets long term is to do value investing. And yet, less than 5 per cent of the universe of investors are value investors. So, for some folks, it all makes sense and they get it in a few minutes. However, the vast majority either never gets it or choose not to follow it.
Most of the principles in your Dhandho framework involve mainly contrarian approach, like investing in a ‘distressed business’ and ‘simple business with ultra-slow growth rate’. The reality is quite contradictory, isn’t it? Also, what is your view about the current rush for acquisitions?
One cannot beat the market by following the herd. One has to think independently. That’s reality with investing. And ‘The Dhandho Investor’ does encourage the reader to buy what others are discarding and sell what others are craving.
Regarding the current rush for acquisitions, it is obviously driven by greed and a lack of fear. Best to get involved when there is extreme fear and a lack of greed. So, in general, this would not be the time to join the acquisitions binge.
How has been your experience in convincing the readers on “investing in low-risk, high-uncertainty business” and “investing in copycat businesses”?
I don’t know. Too soon to tell if people were merely entertained by reading the book or if it caused definitive behaviour change. Getting humans to change their habits and behaviour is very hard to do.
Are you conducting any workshops or seminars to popularise the Dhandho techniques?
I have spoken a few times to different groups on Dhandho over the years and I continue to speak periodically – typically 3 to 4 times a year. But I’m mainly focused on running Pabrai Funds, and secondarily on our foundation.
Can one apply the Dhandho tips in the Indian stock market?
The Dhandho framework is universal. It can (and should be applied) in all markets.
What’s the next book you are working on?
I’m a reluctant author. There are no plans to write another book!
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Tailpiece
At the end of the e-mail signature, Pabrai adds this quote: “I come home to eat and sleep, and that’s about it. I can’t wait until it gets daylight so I can get back to the business.” - Mrs Rose Blumkin a.k.a. ‘Mrs. B’ at age 91, Founder of the Nebraska Furniture Mart.
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