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

by Mohnish Pabrai

We might invest up to 40% of our net worth in a single security under conditions coupling an extremely high probability that our facts and reasoning are correct with a very low probability that anything could change the underlying value of the investment.10 We are obviously only going to go to 40% in very rare situations—this rarity, of course, is what makes it necessary that we concentrate so heavily, when we see such an opportunity. We probably have had only five or six situations in the nine-year history of the partnerships where we have exceeded 25%. Any such situations are going to have to promise very significant superior performance. . . . They are also going to have to possess such superior qualitative and/or quantitative factors that the chance of serious permanent loss is minimal.... In selecting the limit to which I will go in any one investment, I attempt to reduce to a tiny figure the probability that the single investment can produce a result for our portfolio that would be more than 10 percentage points poorer than the Dow.11 —Warren Buffett