what is up everyone I'm rose and welcome back to my channel in this video I'm
gonna share the top 9 tips and takeaways from this book the Dondo investor which
is an amazing investing how-to book written by Mohnish Pabrai british pariah
Andheri Bal u investor who has generated a cumulative return of 517 percent from
the period 2000 to 2013 compared to a cumulative 43% for the S&P 500 index
unfortunately his fund Popeye funds is closed to new investors but the next
best thing to having him manager money is to learn how to invest the way he
does the Dunda investor is based on one key premise that the key to generating
high returns with low risk is by taking a symmetrical bets in other words taking
investments that have a huge potential for upside and a very small potential
for downside heads I win tails I don't lose much this low risk high return
approach to investing is one Mohnish calls of the Sandow method so if you
want to learn some valuable tips and tricks that will help you turn a small
amount of money into a fortune with low risk then keep watching before we get
started have you subscribed to my channel yet if not what are you waiting
for my channel is all about dock investing for beginners and you're gonna
learn a ton about how to put your money to work intelligently so make sure to
subscribe and hit the notification bell because it puts new video videos like
this every week one of the most remarkable examples he gives that the
Dondo method is the story of the tells the Patels are a small ethnic Indian
group that came to the u.s. in the 1970s with nothing and using Dondo investing
principles the Patels went on to become the largest owner of motels in the
entire country so how does a penniless family of immigrants go from zero
dollars to forty billion dollars in motel assets in the span of a few
decades the answer is done doe investing the book synthesizes the done dough
method into nine key principles so let's go over each of these nine prints
the first is to focus on buying existing businesses since existing businesses are
much less riskier than startups mohnish recommends investing only in
companies that have a proven business model and a stable history of operations
and he says that the best way to do that is via buying stocks of publicly traded
companies if you examine the performance of various asset classes over the past
century you'll see that stocks do better than all of the other main asset classes
bonds real estate gold etc not only that but it's the easiest way to become a
business owner because when you buy a stock you get an ownership stake in the
business but you don't have to actually run the business yourself so you get to
reap the rewards of business ownership without doing any of the heavy lifting
yourself plus you can do this with whatever cash you have in your wallet
as long as you have enough money to buy just one share of the company you want
to invest in you can afford an ownership stake in basically any publicly traded
company so to summarize the first principle of dumbo investing focus on
buying existing businesses and do this via the stock market and now for
principle number two invest in simple businesses the dungo investor avoids
investing in complicated companies why there's actually a very numbers driven
reason for this in order to assess whether an investment is a good deal or
not you need to first know the intrinsic value of a business the formula for
estimating what a business is worth or estimating its intrinsic value is by
adding up all the cash flows that will occur during the life of business and
then discounting them at a reasonable interest rate a business's worth is
derived from the cash flows that it generates it's not just pulled out of
thin air so this is called a discounted cash flow analysis in the book mohnish
explains this with the example of the neighborhood gas station so let's say
that the owner of the gas station puts it up for sale out of price of $500,000
and you know that after 10 years the gas station can be sold for $400,000 and
then during those 10 years the gas station will put a hundred thousand
dollars in your pocket every year for the next ten years so that gives an
estimated online of cash flows that looks like
this $100,000 every year for ten years plus a lump sum of $400,000 in the tenth
year and because these cash flows are future cash flows they have to be
converted into present-day dollars if interest rates are ten percent right now
then the present value of these cash flows look like this
comparing future cash flows in present-day terms ensures that we're
comparing apples to apples since the purchase price is also in present-day
terms so the sum of the cash flows in present value terms is four hundred
sixty eight thousand dollars this is what the business is really worth so is
it a good deal well considering that you can buy the gas station for five hundred
thousand dollars it's a great deal because you're paying a lot less for the
business relative to its intrinsic value of seven hundred sixty eight thousand
dollars discounted cash flow of analysis is hands-down the best way to assess
investment opportunities but you can see that estimating future cash flows is not
always an easy task when it comes to predicting the future nobody has a
crystal ball that's why the Gondo way to deal with this uncertainty is to invest
only in simple businesses where the future cash flows can be estimated with
relative confidence so the cash flows of a gas station while they're not
completely guaranteed they're a lot more estimate a bull is that even a word
estimate a bowl then the cash flows of a business such as like a biotech company
that's still in the research phase and they don't have a proven product yet so
rather than try to be all smart and predict the future of these kinds of
complicated companies the Dunda Method wants you to simply avoid those kinds of
companies and just stick with businesses that are relatively predictable and have
stable cash flows examples of businesses like this are motels as in the Patel
story Coca Cola which was Warren Buffett's most successful investment and
Bed Bath and Beyond which Mohnish uses in the book to walk us through a
discounted cash flow analysis and now that brings me to the third component of
the Dondo frameworks invest in distressed businesses in distressed
industries now that you understand how to calculate the intrinsic value of a
business you now have a powerful tool for finding great
investment opportunities just like with the gas station example where you could
buy something worth 768 thousand dollars for only $500,000 when it comes to
stocks you also want to look for ways to buy stocks at less than their intrinsic
value and according to Dondo the best way to do this is to look for distressed
companies so going back to the books story of Pappa Patel and his Motel
investment he bought the motel in the 1970s during a very troubled time in the
economy the country was in a recession and you could pick up motels at fire
sale prices you can also do this in the stock market because stock prices are so
volatile and driven by news headlines the market can be very emotional and
this often creates huge dislocations between a stock's price and its
underlying value so what you're looking to do is to buy a stock when it's
trading out of this stressed price the third principle of the done dough
investing framework is perfectly summed up by this quote from Warren Buffett I
will tell you how to become rich be fearful when others are greedy and be
greedy when others are fearful number four of the Dunda investing method is to
buy businesses with durable moats amost its protection from enemies so in
medieval times a castle needed to have a moat in order to keep out its enemies
and the wider and deeper the moat the greater the protection so it's the same
for businesses because of free market capitalism the competition in any
industry can be brutal if a business doesn't have some sort of competitive
advantage they'll get wiped out by competitors pretty quickly so how do I
know for sure if a business has a moat or not you look at the financial
statements so a business with a strong mode will have great returns on capital
return on capital is a metric that tells us how much income a business is
generating with the capital deployed in the business I made a free download for
you call the stock investing checklist and in it I go over in detail how to
calculate these numbers so be sure to grab it below I've included the link in
the description of this video so you want to look for companies with highly
turns on capital that indicate companies with wide moats
examples of companies with strong moats are American Express Cola really
Davidson and Google moats can come from having a brand name or a cost advantage
economies of scale and all kinds of other reasons again I go over moats in
more detail in my stock investing checklist so go ahead and get the free
download if you're interested and now for principle number five of the Dondo
investing method that heavily when the odds are overwhelmingly in your favor in
investing there's no such thing as a sure bet but as a done dough investor
when you come across a high probability bet you want to bet heavily with the
Patel motel example the Patels saw an opportunity with huge upside and very
limited downside and they jumped on it they had an opportunity to buy a motel
with only three thousand dollars of their own money borrow the rest and
potentially make huge profits so even though $5,000 was their entire life
savings the odds were so good that they went
all-in if you find a company that has a simple business model and they have a
strong moat it's under temporary distress and the stock price has
collapsed so much that you can buy it for less than half of the intrinsic
value then Mohnish recommends that you've bet heavily because with a setup
like that you have a high probability of huge success and then a very low
probability of moderate failure it's this asymmetrical risk that we're
looking for in the book mohnish also explains something called the Kelly
formula which is a simple mathematical formula that tells you exactly how much
of your money to bet on any one investment opportunity the formula is
based on calculating the odds and it was made infamous by Ed Thorpe an MIT
professor who used the formula to basically make a fortune playing
blackjack at Las Vegas casinos although investing is not the same as playing
blackjack thinking probabilistically and betting big in high probability
situations is the main takeaway of this fifth
Dondo investing principle also the book goes more into detail about the kelie
formula so if you're interested in finding out more
definitely check out the book it's super interesting and now for principle number
six focus on arbitrage arbitrage is a fancy term for riskless profit an
example of arbitrage is for example if gold is trading at six hundred dollars
per ounce in London and six hundred ten dollars per ounce in New York then you
would buy it in London and then sell it in New York for a ten dollar riskless
profit and then there's Dumbo style arbitrage the Patel Motel is a perfect
example because the whole family lived and work in the motel the Patels had
virtually no overhead there were no salaries to pay and they were able to
offer their rooms of the cheapest prices while still maintaining fat profit
margins so they had an arbitrage spread over all of their competitors that's
what they were able to scale and grow so quickly and do so well other examples of
done dough style arbitrage spreads are category killers like Walmart Home Depot
and Geico each of these companies has a unique situation that allows them to
make more money than all of their competitors so the arbitrage spread is
essentially another way of describing a moat and Monash teaches that if you find
a Dondo style arbitrage spread like the patella Motel or Walmart or Geico then
you should milk it for all it's worth Wow we've covered a lot here already
principle number seven is to buy businesses at big discounts to their
underlying value this is also called investing with a margin of safety
remember the gas-station example after estimating the cash flows and the gas
stations intrinsic value you realized that you could buy it for a lot less
than what it's worth so you could buy it for 500,000 versus the intrinsic value
of 768 thousand dollars so the difference between that price and the
value is your margin of safety because the future is full of uncertainty and
even the best estimates of cash flow can turn out to be wrong done though
investing wants you to only buy companies at a steep discount to
underlying values that way you don't have to be accurate and perfect about
estimating the future because of a margin of safety protects you from the
unknown so principle number seven is all about
investing with a margin of safety and principle number eight is to look for
low risk high uncertainty businesses the best Dondo style investment
opportunities have a combination of low risk and high uncertainty the low risk
component makes it a conservative bet to take and the high uncertainty component
a lot allows for a big potential payoff other combos like high risk high
uncertainty or low risk low uncertainty you don't want to take those because
first of all high risk high uncertainty businesses that just sounds like
gambling and you also don't want to take low risk low uncertainty bets because
there's just no potential for any games there so you want that ideal combo of
low risk high uncertainty the Potala motel with the perfect low risk high
uncertainty business because all that was at risk was their $5,000 down
payment so even in the worst case scenario there wasn't that much for them
to lose yet there was huge potential for upside because the future of the motel
industry was at such a shaky point in in the in the economy low risk and high
uncertainty is the ideal combination for the done dough investing framework and
finally principle number 9 invest in the copycats rather than the innovators with
the Dondo investing framework mohnish says that innovation is a crapshoot
whereas taking an already proven idea and scaling it is much more reliable
when the first papel bought a small motel and found some success other Patel
relatives copied him and bought their own motels pretty soon patel's copied
this model all over the US and because it was a proven idea they did very well
the proof that the coffee cap strategy works is in the numbers one out of every
five motels in the United States is owned by a Patel if this works for a
small group of refugees who came to the US with nothing then I'd say it's a
pretty good strategy other examples of hugely successful companies that were
copycats rather than innovators are McDonald's and Microsoft both of these
companies actually did not have any original ideas but they were successful
because they're good at exit and feeling the founder of McDonald's
Ray Kroc he models his restaurant after a very successful hamburger stand that
he came across in California total copycat and Microsoft they let license
their flagship product from a company called Seattle computer so their
operating system which is what they're known for they actually didn't even
invent it on their own since the Dondo tagline is heads I win
tails I don't lose much mohnish recommends investing in the
companies that know how to be good copycats of a proven idea in closing
this book pack in an MBA level investing education in less than 200 pages it's a
quick easy read and it simplifies some really advanced investing concepts into
a simple proven framework that anyone can use it's my third time reading it
now and I'm getting even more Jen's every time I read it if this kind of
investing is exciting to you then don't forget to grab my stock investing
checklist it's free and I've linked to it below it's gonna help you analyze
stocks from a very objective perspective and go
through some some of the criteria that we talked about here did you like this
video if so then please give it a thumbs up and if you have any questions at all
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always remember to go after your dreams unapologetically and to live life on
your terms Cheers