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December 24, 2016 - January 9, 2018
How do we know when a business
has a hidden moat and what that moat is? The answer is usually visible from looking at its financial statements. Good businesses with good moats, like our barber, generate high returns on invested capital.
Of the fifty most important stocks on the NYSE in 1911, today only one, General Electric, remains in business. . . . That’s how powerful the forces of competitive destruction are. Over the very long term, history shows that the chances of any business surviving in a manner agreeable to a company’s owners are slim at best.
average Fortune 500 company had a life expectancy of just 40 to 50 years.
It takes about 25 to 30 years from formation for a highly successful company to earn a spot on the Fortune 500. Geus found that it typically takes many blue chips less than 20 years after they get on the list to cease to exist.
The average Fortune 500 business is already past its prime by the tim...
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We are best off never calculating a discounted cash flow stream for longer than 10 years or expecting a sale in year 10 to be at anything greater than 15 times cash flows at that time (plus any excess capital in the business).
The wise ones bet heavily when the
world offers them that opportunity. They bet big when they have the odds. And the rest of the time, they don’t. It’s just that simple.3 —Charlie Munger
Investing is all about the odds—just like blackjack.
We probably have had only five or six situations in the nine-year history of the partnerships where we have exceeded 25%.
Dhandho is all about placing few bets, big bets, infrequent bets; and the Kelly Formula supports this hypothesis.
Using the Kelly Formula may lead to relatively high volatility. The formula optimizes just one variable—the maximization of wealth in the least amount of time. It is agnostic on volatility. Volatility can be tamed by underbetting the Kelly Formula maximum—but this comes at a price of suboptimal capital allocation.
And 7 to 10 ideas do make up 80 + percent of the portfolio.
Looking out for mispriced betting opportunities and betting heavily when the odds are overwhelmingly in your favor is the ticket to wealth.
Low risk, high uncertainty, and arbitrage are the core fundamentals of how good entrepreneurs operate.
We like to own castles with large moats filled with sharks and crocodiles that can fend off marauders—the millions of people with capital that want to take our capital. We think in terms of moats that
are impossible to cross, and tell our managers to widen their moat every year, even if profits do not increase every year. We think almost all of our businesses have big and widening moats.3
How long is the spread likely to last and how wide is the moat?
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.4
“Smart, Intelligent, Brilliant, Genius, Simple.”
The bigger the discount to intrinsic value, the lower the risk. 2. The bigger the discount to intrinsic value, the higher the return.
Whenever I make investments, I assume that the gap is highly likely to close in three years or less. My own experience as a professional investor over the past seven years has been that the
vast majority of gaps close in under 18 months.
Graham’s fixation on margin of safety is understandable. Minimizing downside risk while maximizing the upside is a powerful concept.
It is during times of extreme distress and pessimism that rationality goes out the window and prices of certain assets go well below their underlying intrinsic value.
they were all low-risk, high-uncertainty businesses.
Heads, I win; tails, I don’t lose much!
As Warren Buffett has succinctly stated, industries with rapid change are bad for the investor.
A high dividend yield is sometimes indicative of a stock being undervalued.
In investing, all knowledge is cumulative.
Fear and greed are very much fundamental to the human psyche.
Read voraciously and wait patiently, and from time to time these amazing bets will present themselves.
they simply lifted a proven idea and scaled it.
Innovation is a crapshoot, but investing in businesses that are simply good copycats and adopting innovations created elsewhere rules the world.
Good cloners are great businesses. Innovation is a crapshoot, but cloning is for sure.
First, the Buffett Partnerships had a very unusual fee structure. He charged no management fees to his partners—only performance fees. Investors paid no fee until Mr. Buffett gave them a return of at least 6 percent a year. Above that number, he took 25 percent and investors got the rest.
First, it ought to be very appealing to a good number of mutual fund and hedge fund investors due to the superior economics.
Having a moat that your competitors can see in broad daylight but never ever cross is just fantastic—and a rarity.
Despite our policy of candor, we will discuss our activities in marketable securities only to the extent legally required. Good investment ideas are rare, valuable and subject to competitive appropriation just as good product or business acquisition ideas are.16
If you carefully study the most successful businesses around, you’ll notice that much of it has been lifted and scaled by great executers.
In seeking to make investments in the public equity markets, ignore the innovators. Always seek out businesses run by people who have demonstrated their ability to repeatedly lift and scale. It is the Dhandho way.
A critical rule of chakravyuh traversal is that any stock that you buy cannot be sold at a loss within two to three years of buying it unless you can say with a high degree of certainty that current intrinsic value is less than the current price the
market is offering.
Once three years have passed, all the shackles are off. At this point, I would be open to selling at any reasonable price—even if it means a big loss on the investment. Markets are mostly efficient and, in most instances, an undervalued asset
will move up and trade around (or even above) its intrinsic value once the clouds have lifted. Most clouds of uncertainty will dissipate in two to three years.
“Time is the best healer!”
Pabrai Funds decided to exit USAP at anything over 90 percent of intrinsic value ($31.50) if there was another place I could deploy the proceeds. And at 100 percent of intrinsic value, I was ready to sell regardless of use of proceeds. It had been a long, hard battle.
As it gets over 90 percent of intrinsic value, Pabrai Funds will resume its selling.
The “holding losers for at
