But, every once in a while a business with a secret sauce for enduring outsize profits emerges." The irony is that, in that pursuit, they usually destroy all outsized profits.
"Capitalists strive hard to capitalize on any opportunity to make outsize profits. In chapter nine, Pabrai moved on to businesses with durable moats, with this insight: Then, apply "the rest of the Dhandho framework" to those that are left. Pabrai wrote, "All we need do is to first narrow the universe of candidate businesses down to ones that are understood well and are in a distressed state."Īfter providing a list of sources for finding distressed businesses, he said there should be a "plethora of candidate distressed businesses to examine." To sort out those businesses, he recommended eliminating any listings that are not simple businesses or are beyond an investor's circle of competence. Out of the many thousands of stocks trading daily, many opportunities can be found at any time. Unlike the buyers of whole businesses, such as motels or steel mills, stock market investors need not wait very long. Market arrives at prices and the way business people determine the prices of whole businesses.Īnd, with that, he arrived at the issue of buying distressed businesses. The author wanted readers to recognize that there is an important distinction between the way Mr. Market, with his constant buying and selling, sometimes driven by fear and sometimes driven by greed. That led Pabrai to Benjamin Graham's creature, Mr. As a result, share prices are more volatile than intrinsic values. That gap arises because markets are subject to human emotions and drives, including Buffett's famous distinction between fear and greed. Pabrai conceded that the market is "mostly efficient." But there is a difference between mostly efficient and fully efficient: "It is this critical gap that is responsible for Mr. "Investing in a market where people believe in efficiency is like playing bridge with someone who has been told it doesn't do any good to look at the cards." "I'd be a bum on the street with a tin cup if the markets were always efficient." Pabrai, a very big fan of Warren Buffett ( Trades, Portfolio), responded with a couple of stick-it-in-your-eye quotations from Buffett: One of the implications of the theory is that there is no point in trying to assess a firm's intrinsic value, and, with transaction costs considered, stock picking is bound to be a negative-sum game. Pabrai led into the "distressed businesses in distressed industries" chapter by going after the proponents of Efficient Market Theory (EMT), who argue that essentially all known information about a company is available to all investors and is reflected in the market price. It's also in his book, "The Dhandho Investor: The Low-Risk Value Method to High Returns," published in 2007.
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