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Username Post: Review of "Dhando Investor" - 1 out of 5 stars.        (Topic#5790)
Posts: 249

Reg: 09-24-07

04-25-12 01:32 AM - Post#6208    

DailyStocks.com gives a 1 out of 5 star for this book, written by Mohnish Pabrai. We like Mohnish Pabrai as a person. He does many good things for charity. However, we do not recommend this book for someone who wants to learn value investing. Save the $20 and buy this $8 book instead: The Little Book that Still Beats the Market

We thought that the author's thinking lacked rigor and robustness. The real test of a good book is that the content of a good book must stand the test of time. In this case, "Dhando Investor" failed the test. Just like many companies profiled in Jim Collins' "Good to Great" turned out to be mediocre after all, many of the supposedly great investments Pabrai mentioned in the book turned out to be long-term duds.

According to Pabrai, "Dhando" investing is "Tails I win, Heads I do not lose much". This concept all sounds good, until it is tested in real practice. In the book, he carefully talks about each particular investment of his as having this characteristic. He provided case studies. However, his investments in Pinnacle Airlines, Delta Financial proved that Pabrai was really betting on "options", not "Dhando". "Options" have a place on portfolios, but a concentrated portfolio of "options" does not make for "Dhando" investing.

There is a huge difference between a diversified portfolio of probabilities, each of which can become zero with high potential returns, versus a concentrated portfolio of "Dhando" investments, none of which have a high chance of becoming zero but possibly with less potential returns. The former fits the Chartered Financial Analyst (CFA) rule of Prudent Investor Rule. The latter fits the CFA rule of the Prudent Man Rule. Prudent Investor Rule states that a portfolio can have many individual losers but if the weights of each investment is small enough, the overall portfolio can still have good returns. Prudent Man Rule states that each investment in a portfolio must not have the risk of becoming a zero. Based on these definitions, you can have a concentrated portfolio if it follows the Prudent Man Rule. But you definitely need a diversified portfolio if it follows the Prudent Investor Rule.

During the years leading up to 2007, Pabrai's 7 year investing record looked really good that many investors started according him a "Halo" effect, the staff at DailyStocks included. This book was written before the 2008 crisis, and post-crisis, Pabrai changed his investing style from concentrated to being much more diversified. To us at DailyStocks.com, this change is his silent admission that his "Dhando Investing" way of analyzing stocks could not explain the various zero outcomes of his "individual" ideas. Hence, he had to become more "diversified" to account for these zero outcomes.

It is also a lesson for us at DailyStocks.com that no single investor deserves a Halo effect. Every investment must be scrutinized for its own merit and flaws, not based on "who" owns it.

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Edited by dailystock_admin on 04-25-12 02:10 AM. Reason for edit: No reason given.

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