Invest In Existing Businesses – The Dhandho Framework

Currently I’m reading a great book by Mohnish Pabrai – The Dhandho Investor in which he talks about The Low-Risk Value Method to High Returns.

In this book he taught us about The Dhandho Framework which absolutely helps us to become a better Investor, I would try my best to share the key points from his teachings.

Focus on Buying Existing Business, A Business with a well-defined business model and a long history of operations that you could analyze. This is way less risky than doing a startup.

As Mohnish Pabrai says in his book, Heads, I win; Tails I don’t lose much!

There are many asset classes available for Investing like Bonds, Real Estate, Stocks, Private Businesses, Gold, Silver and many more the list is endless. But if you examine, the past historical returns of stock indexes – it is pretty clear that stocks do better than all other easily accessible asset classes.

Since the Evidence also suggests, over the long haul, the best place to invest assets is in common stocks.

Stock Is Seen in Two Ways by Humans
  1. A Stock is seen by many as a cryptic piece of paper whose price wiggles around continuously. 
  2. A far better way, suggested by Benjamin Graham, is to think of them as an ownership in an existing business.
Six Benefits of Investing In Stocks V/s Buying & Selling Entire Business
  1. Entire Business require some serious heavy lifting, either you need to run it or find someone competent and
  2. Buying a Stock gives you ownership in underlying business which is already staffed and running.
  3. While buying Entire Business you typically end up with fair to exuberant pricing whereas Stock Market operates like the pari-mutuel system in horse racing-prices are determined by an auction process.
  4. Buying Entire Business require some serious capital. In Stock Market, you can invest in a business with whatever amount you have in your wallet right now.
  5. You can Invest in Stocks with just a click of mouse, think of Investing in Entire Business available within 25 miles near you, You may not find one.
  6. Stock Market transaction have Ultra Low Frictional Cost.

If you stop to think about it, a pari-mutuel system is a market. Everybody goes there and bets and the odds change based on what’s bet. That’s what happens in the stock market. ~ Charlie Munger

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