Mohnish Pabrai’s excellent book on investing The Dhandho Investor, (which I’m currently in the process or re-reading) should be required reading for all investors.
This book is not a how-to investment guide, nor is it particularly focused on stock market investing at all. Instead, it is primarily a guide to the concept of Dhandho (pronounced dhun-doe).
Every investor and business operator should understand the concept of Dhando. As Pabrai describes in his book, Dhandho is a Gujarati word, which when literally translated means “endeavors that create wealth.” The street translation simply means “business,” although as Pabrai notes, “what is business if not an endeavor to create wealth?”
But Dhandho has another meaning that its literal translation does not reflect — the idea that any business endeavour should seek to minimise risk while at the same time maximising reward. Or as Pabrai puts it, “heads I win, tails I don’t lose much.”
This is similar to the idea put forward by the Godfather of value investing Benjamin Graham. Graham was well-known for his teachings on minimising investment risk (defined as a permanent capital impairment) while looking for those stocks with the highest return potential.
Pabrai gives several examples of the Dhando principle playing out in real life within his book, and the one that sticks out is the story of Virgin Atlantic and Richard Branson.
Today, Virgin Atlantic is one of the world’s premier airlines, but it was started in a relatively chaotic fashion. In 1984, Richard Branson, the owner of Virgin Records was sent a business plan for a business class only transatlantic airline, in what must have been a last-ditch attempt by the plan’s creator to get the idea off the ground. After all, what does a record label boss know about running an airline?
As it turns out, Branson was the perfect man for the job, not because of his experience in the airline business, but because of his approach to doing business.
Virgin Airlines became the perfect example of Dhando in action. Unperturbed by price wars, excessive running costs and the capital requirements of setting up an airline (not to mention the unions) Branson set out to buy a plane. After enquiring at Boeing, he calculated that his outlay for setting up the business would be just $2 million, compared to earnings of $12 million for his record company for the year. As a percentage of overall group profit then, setting up Virgin Atlantic was not going cripple him if it didn’t work out. Other factors worked in Branson’s favour as well, as Pabrai describes:
“Branson noted that in the airline business with a single plane, he would pay for the fuel 30 days after the airplane landed and for staff wages 15 to 20 days after the airplane landed, but he would get paid for all the tickets about 20 days before the plane took off. Working capital needs in this scenario were pretty low and, with a very favourable short-term lease from Boeing, there was no need to buy an aeroplane.”
In other words, the plane’s passengers would inadvertently be short-term financing for the young company. By using ticket receipts as a form of float, Branson could get the business off the ground with a very low capital outlay, minimising his potential loss if venture never took off.
This method isn’t unique to Virgin Atlantic; it’s part of the whole Virgin Group:
“The common ingredient in virtually all 200+ [Virgin] businesses is that there was very little money invested in any of them at startup. Heads, I win; tails, I don’t lose much!”
“With minimal downsides, failure rates don’t Matter To Sir Richard Branson. Even if half the ventures fail or never scale Up, It Doesn’t Matter. There’s virtually no money put into them to begin with… Branson is an ultra-low risk, ultra-high return VC. People keep feeding him ideas, and he acts on a select few. He gets large equity Stakes, sometimes 50/50 equity stays in these businesses without putting any money in them.”
While Richard Branson may not be as well known in the investing world as Warren Buffett for example, his approach should not be ignored. The concept of Dhandho and the “Heads, I win; tails, I don’t lose much!” approach to investing and business almost guarantees success, if you’re willing to work at each idea. Some ideas may never get off the ground but as long as they don’t wipe you out, you live to fight another day.