The Dhandho Investor: The Low-Risk Value Method to High Returns

by Mohnish Pabrai

least two to three years”

Don’t hesitate

to take a realized loss once three years have passed. Such losses are your best teachers to becoming a better investor.

While it is always best to learn vicariously from the mistakes of others, the lessons that really stick are ones we’ve stumbled though ourselves. Over time, learning from your stumbles, you’ll begin to notice ...

Anytime this gap narrows to under 10 percent, feel free to sell the position and exit.

A lot of great fortunes in the world have been made by owning a single wonderful business. If you understand the business, you do not need to own very many of them.5 —Warren Buffett

Really outstanding investment opportunities are rare enough that you should really have a go at it when it comes around, and put a huge portion of your wealth into it. I’ve said in the past you should think of investment as though you have a punch card with 20 holes in it. You have to think really hard about each one, and in fact 20 (in a lifetime) is way more than you need to do extremely well as an investor.6 —Warren Buffett

This idea (of focused value investing) has zero currency in academic circles. Investment managers don’t feel they will make enough money this way. It’s so foreign to them.7 —Charlie Munger

Billy Rose used to say that if you have a harem of a hundred girls, you never get to know any of them very well. The trick is to know a lot about what you own, and you don’t own that many things.8

The mantra always is “few bets, big bets, infrequent bets”—all placed when the odds are overwhelmingly in your favor.

Finally, he adds the two numbers for each stock. The businesses with the lowest resulting numbers show up as Magic Formula stocks. A company like Google might get a rank close to 1 for return on invested capital and close to 3,000 for P/E ratio, yielding a total number around 3001. It is thus unlikely to be a Magic Formula pick.

If the archer can’t fixate on just the target, success is likely to be elusive.

Do not make the fatal mistake of looking at five businesses at once. Learn all you can about the business that jumps out for whatever reason and fixate solely on it. Once you’re at the finish line with your analysis, only then look at the broader circle of competence.