Important ideas often echo. Pondering those of Nassim Taleb, the Dhando approach of the stunningly successful investor Mohnish Pabrai rings especially loud.
Pabrai began his career as a technology professional but switched to investing after discovering Warren Buffett in 1994. Unlike most people, he has since got to meet and befriend his hero.
Buffett hosts an annual charity lunch at New York’s Smith and Wollensky steak house. In 2007, the then largely unknown investors Guy Spier and Mohnish Pabrai famously paid over $650,000 each for the pleasure of dining with him. Considering it a bargain ever since, Spier and Pabrai have regularly waxed grateful about the experience.
Guy Spier is the CEO of Aquamarine Capital in Zurich. Following his lunch with Buffett and inspired by Buffett’s decision to spend his career in Omaha Nebraska, he decided to move away from the fury of Wall Street and has since invested successfully from the relative calm of the beautiful Swiss city. More recently, he published a surprising bestseller, The Education of a Value Investor, where his admiration for Pabrai is a consistent theme. In addition to liberal mention of his friend throughout, he underlines his high regard by devoting a full chapter to Doing Business the Buffett-Pabrai Way.
Pabrai is fascinated by the power of compounding. To illustrate, he tells the fable of the man who invented chess and the reward he sought from an initially grateful King. The inventor asked for a single grain of wheat to be placed on the first square of the chessboard, to be followed on successive squares by double that on the previous square for each of the 204 squares. The happy King hastily agreed to this seemingly small payment. Before long he ruefully realised that he had promised more wheat than had ever been harvested. The shrewd and now wealthy inventor benefitted spectacularly from the incredible power of compounding.
Inspired by the extraordinary success of Buffett in harnessing this power for decades, Pabrai became a devoted follower in 1994. Since then he has generated a stunning annualised investment return of over 20 per cent and has been the managing partner of the Pabrai Investment Funds since their launch in 1999.
In his disarmingly readable book, The Dhando Investor, Pabrai grounds his investment approach and success in the story of the forced migration of the ethnic Indian population from Uganda to the United States in 1972. Effectively ordered out of Uganda at gunpoint and penniless by the dictator Ide Amin, many of the fleeing migrants achieved remarkable economic success in their new home by following a clearly defined approach to business and investing.
The Dhando approach is a Guajarati concept which roughly translates into seeking exposure to great potential upside with little downside, or as Pabrai memorably puts it in his book, seeking exposures characterised by a Heads I win, Tails I don’t lose much payoff.
Pabrai is particularly inspired by the incredible story of the Patel family in rising to a position of nationwide dominance in the Motel business, from a starting point of near destitution on their arrival from Uganda. The Patel family are classic Dhando Investors, successfully compounding their capital by following a Heads I win, Tails I don’t lose much approach to building their Motel empire across the United States in less than a generation.
The echo with Taleb is loud and clear. In his 2012 essay, Understanding is a poor substitute for Convexity (Anti-fragility), he provides the telling insight and image:
‘…in complex systems, ones in which we have little visibility of the chains of cause-consequences, tinkering, bricolage, or similar variations of trial and error have been shown to vastly outperform—it is nature’s modus operandi. But tinkering needs to be convex; it is imperative. Take the most opaque of all, cooking, which relies entirely on the heuristics of trial and error, as it has not been possible for us to design a dish directly from chemical equations or reverse-engineer a taste from nutritional labels. We take hummus, add an ingredient, say a spice, taste to see if there is an improvement from the complex interaction, and retain if we like the addition or discard the rest. Critically we have the option, not the obligation to keep the result, which allows us to retain the upper bound and be unaffected by adverse outcomes.’
More gain than pain
Resonating strongly with the Dhando approach, Taleb coined the word antifragile to describe Heads I win, Tails I don’t lose much exposures. In quoting an old Yiddish proverb, he captures the essence of what can usefully be thought of as the Dhando approach to antifragility:
‘Provide for the worst; the best can take care of itself.’
As investors facing into the necessarily unknowable future, we are likely to profit from heeding it. Next time, I hope to ponder his thoughts further to help draw some lessons for policymakers.