One of the key on which the value investing has been resting for the last so many years is that as an investor you should not lose the money. This has been emphasized by Graham as well in the form of margin of safety and later on by Warren Buffett, which said once said that the successful investing is, "Rule No.1 is never lose money. Rule No.2 is never forget rule number one." â€¯

So here the equation is different. You do not have to take higher risk to generate higher returns. This is one strategy where you can actually minimize risk and still make good returns.

If you read this wonderful book "The Dhandho Investor", again written by a well-known value investing practitioner and an Indian origin, Mohnish Pabrai, you will actually get to know how it is possible and how it can be done successfully.

Mohnish Pabrai has well-articulated and discussed India's savvy business community Patel framework of doing business and allocation of capital in the book and demonstrated an approach which has been practiced so successfully.

Patels have flourish in the US from nowhere owning some of the best businesses and paying huge taxes to the government has become a model that demonstrate the low risk and return approach. The book talks about the simple methods and approaches that are describer by Buffett, Graham, and Munger with the blend of Patel model.

HERE ARE FEW VALUABLE CONCEPTS FROM THE BOOK.

FOCUS ON AN EXISTING BUSINESS

If you are investing in an existing business you have lot more advantage in terms of analysing it in the different cycles and getting the right information required to be sound investment judgement.

This is why it is important to look for the companies that have been in the business for long rather than searching for new starts ups or some fancy names which are making headline of late.

These are fairly low risk and predictable businesses because of their existence and ability demonstrate performance over a period of time.

Here the objective is to remove the risk that comes with the new businesses, which may not have a proven track record. It is not new, it is the proven business that makes money.

INVEST IN SIMPLE BUSINESSES

In line with the philosophy of not losing the money the other important thing that he outline is to invest in simple business that are easy to understand and predict without much scientific work or expertise needed to analyse the operation. So if you have to choose between a railroad company and aviation which one do you think has got the simple business model?

This is the key here again the objective here is to avoid risk while investing only in those companies where you can understand the business and read the activities that influence them.

During the course of operation many companies go out of businesses for reasons that are often not known to the investors because they never understood what driven a particular business. And when things go wrong investors are left with the nothing but losses.

â€¯

INVEST IN DISTRESSED ASSETS

According to Pabrai, human behaviour and psychology have its impact on the share prices. Like the way Graham described that when the pendulum swing it swings to extreme in both the direction because of the force.
Likewise in the investing when people start to go negative about a company and a stock the share price of that company swing to so low that the situation may not even warrant for such a correction.
According to Pabrai this the time when you got hit the ball or you got to invest. At this time, because of the excessive fear, there is high probability of buying some of the cheapest stock.

He quoted Warren Buffett saying.........

INVEST IN BUSINESS WITH DURABLE MOATS

Again the safety of capital is important and one of the things that protect the business and investors capital is the moat. Most is nothing but the key sustainable competitive advantages that a company is having.

If a company is having durable and sustainable advantage there is likelihood that business will never go out of the fashion.

Companies which do not have competitive advantages often die or get wiped out by the competition before they actually make money for the shareholders.

Fixed line telephone services providers are today literally out of business with the mobile telephone capturing the entire market.

BET HEAVILY WHEN THE ODDS ARE IN YOUR FAVOUR

It is one thing to be standing right at the top of the gold mine and other to actually be able to carry. So the best thing is to load the truck when the opportunity strike and you know that the odds are in your favour. Investors like Warren Buffett and Charlie Munger simply do nothing for years.

They hardly make any investment decision till the time they encounter a deal which is worth taking. For instance Warren Buffett bought huge amount of shares and invested heavily during the crash of 2008 and bought some of the banks which were junked by the Street.

FOCUS ON ARBITRAGE

When the risk is controlled or minimized the focus now is on the returns and the one of the tricks that the book discuss is finding some of the wide arbitrage in the market which often are available due to mispricing of the businesses.

The book defines arbitrage as an attempt to profit by exploiting price differences in identical or similar financial instruments.

The trick is to gain about of the mispricing while remaining invested till the arbitrage shrink or evaporates.
They are often risk free because of the nature of the underlying.â€¯â€¯â€¯â€¯

MARGIN OF SAFETY

When you buy something at 50, which worth Rs 100, you have got the deal. This is not only prepares you for the future volatility in the prices but make sure if the prices reach to its original value you will make handsome returns. Margin of safety is similar. This is again the idea of Graham where he talked about buying businesses at low prices.

You buy something below its intrinsic value and possible at substantial discount so that the possibility of something going wrong does not really impact you as most of the risk is already built in the price. So the margin of safety is important concept that Pabrai has dwelled in the book both from the point of view of minimising the risk at the same time generating higher returns.

LOW RISK, HIGH UNCERTAINTY

When the fear is at the extreme end and there is huge uncertainty people do not want to own that stock even at any price. But if you have understanding and are able to figure out that there is very remote possibility of the business going burst or a remote possibility of permanent loss of capital than there is a huge deal to be made because the prices will be so attractive that one can make huge returns over a period. And since you are buying a business at the extreme of the fear it is quite possible that the risk from the price at which you bought is hardly anything.

IT IS BETTER TO BE COPYCAT THAN AN INNOVATOR

Pabrai does not believe in reinventing the wheel when it is not required. Must for the sake of ego you do not want to recreate something which is already created and being proven. So he said the Patel's had paved the way for the next generation showing the right path of doing business.

What you need is simply copy that and do the business. Likewise in investing you actually copycat some of the ideas that already explored. So if your neighbor is a great stock picker you simply go and ask where he has invested. And then do your homework and see if that makes sense for you. He calls this cloning of ideas where you actually save lot of time, energy and money.

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