The Dhandho Investor by Mohnish Pabrai

Summary

Pabrai explains all the core concepts of investing in an entertaining, simple and clear manner. Mandatory reading for those interested in investing or entrepreneurship.

Key Takeaways

• Role models play a huge role in how humans pick their vocations.
• Focus on: Heads, I win; tails, I don’t lose much
• With minimal downsides, failure rates don’t matter.
• 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 stakes in these businesses without putting any money in them.
• Get a dollar’s worth of assets for far less than a dollar. 
• The Dhandho framework:
  • Invest in existing businesses.
  • Invest in simple businesses.
  • Invest in distressed businesses in distressed industries.
  • Invest in businesses with durable moats.
  • Few bets, big bets, and infrequent bets.
  • Fixate on arbitrage.
  • Margin of safety—always.
  • Invest in low-risk, high-uncertainty businesses.
  • Invest in the copycats rather than the innovators.

• Simplicity is a very powerful construct.
  • Einstein noted that the five ascending levels of intellect were, “Smart, Intelligent, Brilliant, Genius, Simple.”
• Buy painfully simple businesses with painfully simple theses for why you’re likely to make a great deal of money and unlikely to lose much. I always write the thesis down. If it takes more than a short paragraph, there is a fundamental problem.
• Good businesses with good moats generate high returns on invested capital.
• Kelly Formula: Edge/odds = Fraction of your bankroll you should bet each time.
  • A “quarter-Kelly” is a good way to go.
• Low risk, high uncertainty, and arbitrage are the core fundamentals of how good entrepreneurs operate.
• Rapidly changing industries are the enemy of the investor.
• Innovation is a crapshoot, but investing in businesses that are simply good copycats and adopting innovations created elsewhere rules the world.
• Seven questions to ask before buying a stock:

1. Is it a business I understand very well – squarely within my circle of competence?
2. Do I know the intrinsic value of the business today and, with a high degree of confidence, how it is likely to change over the next few years?
3. Is the business priced at a large discount to its intrinsic value today and in two to three years? Over 50 percent?
4. Would I be willing to invest a large part of my net worth into this business?
5. Is the downside minimal?
6. Does the business have a moat?
7. Is it run by able and honest managers?

• Critical selling rule: any stock that you buy cannot be sold at a loss within two to three years of buying it unless you can say with a high degree of certainty that current intrinsic value is less than the current price the market is offering.
• The key to being a successful investor is to buy assets consistently below what they are worth and to fixate on absolutely minimizing permanent realized losses.

What I got out of it

I’ve read 15+ investment books in the past 2 months and this one really stood out. Pabrai explained every value investment principle in the book in an entertaining and easy-to-understand manner…and even connected it to entrepreneurship. This will be the book I recommend to beginner investors or entrepreneurs. It’s just that good (and short!). 

It’s light on valuation techniques and how to analyze a company’s books, but it covers everything else you need as an investor.

What I especially appreciated:

• The Dhandho framework
• A great pre-purchase checklist of 7 questions to ask yourself
• How and when to sell
• Introducing me to the Kelly Formula – and suggesting to go with a “quarter-Kelly” when determining allocation
• How and where to find companies to look into, and how to determine which ones to research and which ones to skip.

If anything, remember these three lessons and you’ll have a prosperous life:

• Entrepreneurship: low risk, high uncertainty, and arbitrage are the core fundamentals of how good entrepreneurs operate. 
• Investing: the key to being a successful investor is to buy assets consistently below what they are worth and to fixate on absolutely minimizing permanent realized losses.
• Life: Heads, I win; tails, I don’t lose much!

Summary Notes

Patel Motel Dhandho

Dhandho is all about the minimization of risk while maximizing the reward.

Dhandho is capital allocation at its very finest. If an investor can make virtually risk-free bets with outsized rewards, and keep making the bets over and over, the results are stunning. 

The reason we end up with concentrations of ethnic groups in certain professions is because role models play a huge role in how humans pick their vocations.

This is an existing business with a very stable business model and a long history of cash flow and profitability. It is not rocket science. It is a simple business where the low-cost provider has an unassailable competitive advantage, and no one can run it any cheaper than Papa Patel. The motel business ebbs and flows with the economy.

Look at this investment as a bet. There are three possible outcomes.

1. The $5,000 investment yields an annualized rate of return of 400 percent. Let’s assume this continues for just 10 years and the business is sold for the same price as it was bought ($50,000). This equates to a 21-bagger—an annualized return of well over 50 percent for 10 years.
2. The economy goes into a severe recession and business plummets for several years. The bank works with Mr. Patel and renegotiates loan terms. Mr. Patel has a zero return on his investment for five years and then starts making $10,000 a year in excess free cash flow when the economy recovers and booms (200 percent return every year after five years). The motel is sold in year 10 for the purchase price. This equates to a 7-bagger—an annualized return of over 40 percent for 10 years.
3. The economy goes into a severe recession and business plummets. Mr. Patel cannot make the payments and the bank forecloses and Mr. Patel loses his investment. The annualized return is 100 percent.

From Papa Patel’s perspective, there is a 10 percent chance of losing his $5,000 and a 90 percent chance of ending up with over $100,000 (with an 80 percent chance of ending up with $200,000 over 10 years). This sounds like a no-brainer bet to me.

Papa Patel does bet it all on one bet, but he has an ace in the hole. If the lender forecloses and he loses the motel, he and his wife can take up jobs bagging groceries, work 60 hours a week instead of 40, and maximize their savings. At the 1973 minimum wage of $1.60, they earn $9,600 a year.

After taxes, they can easily sock away $2,000 to $4,000 a year. After two years, Papa Patel could step up to the plate and buy another motel and make another bet.

The odds of losing this bet twice in a row are 1 in 100.

And the odds that it pays off at least once are roughly 99 percent. When it does pay off, it’s over a 20-fold return.

That’s an ultra low-risk bet with ultra-high returns— one very much worth making: Heads, I win; tails, I don’t lose much!

The formula is simple: fixate on keeping costs as low as possible, charge lower rates than all competitors, drive up the occupancy, and maximize the free cash flow. Finally, keep handing over motels to up-and-coming Patel relatives to run while adding more and more properties.

Manilal Dhandho

The Dhandho spirit: He worked hard, saved all he could, and then bet it all on a single no-brainer bet. Reeling from the severe impact of 9/11 on travel, the motel industry was on its knees. As prices and occupancy collapsed, Manilal stepped in and made his play. He was on the hunt for three years. He patiently waited for the right deal to materialize. Classically, his story is all about “Few Bets, Big Bets, Infrequent Bets.” And it’s all about only participating in coin tosses where “Heads, I win; tails, I don’t lose much!”

Virgin Dhandho

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 airplane.

The “business plan” was done in a weekend and resided in Branson’s head. There was no business plan ever written, there was no board of directors or advisors at startup, no venture capitalists (VCs), or angels.

if you can start a business that requires a $200 million 747 jumbo jet and a boatload of employees in a tightly regulated industry for virtually no capital, then virtually any business that you want to start can be gotten off the ground with minimal capital. All you need to do is replace capital with creative thinking and solutions.

The Virgin Group today is a privately held group of 200+ businesses with about $7 billion in annual revenue. It generates about $600 to $700 million a year in free cash flow. The common ingredient in virtually all 200+ businesses is that there was very little money invested in any of them at startup. Heads, I win; tails, I don’t lose much!

Another example of classic Dhandho is Virgin Mobile, Virgin’s cell phone service in the United States. Virgin Mobile does not own or operate a cell phone network. Sprint provides the entire backend and delivers the service under the Virgin Mobile brand. Virgin targeted teens with this service and focused the offering to be very attractive to teens—cool phones and phone skins, prepaid phone cards, and the teen-centric Virgin brand. Virgin’s investment was very low. If it failed, it had virtually no downside. Sprint provided all the technology, billing, and customer service infrastructure. Virgin provided the branding and product positioning, and it took a large chunk of the profits. If it worked, there was huge upside for Virgin and a negligible downside if it failed. Virgin Mobile scaled very rapidly

Virgin Mortgage: Virgin had virtually no investment. The entire backend was handled by the bank. All Virgin provided was the brand and helped with the marketing – very little cash invested. In return, it got a good chunk of the profits.

Mittal Dhandho

With minimal downsides, failure rates don’t matter to Sir Richard Branson. Even if half these 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 stakes in these businesses without putting any money in them.

What is amazing about Lakshmi Mittal’s Dhandho journey is that he invested all his energies and tiny capital base in an industry with terrible economics—steel mills. The steel industry has been one of the worst places to invest capital in the past 30 years. Despite having all the odds stacked against him, he ended up creating one of the largest and most profitable steel businesses on the planet.

Mittal’s approach has always been to get a dollar’s worth of assets for far less than a dollar. And then he applied his secret sauce of getting these monolith mills to run extremely efficiently.

Marwari businesspeople, even with only a fifth-grade education, simply expect all their invested capital to be returned in the form of dividends in no more than three years. They expect that, after having gotten their money back, their principal investment continues to be worth at least what they invested in it. They expect these to be ultra low-risk bets.

I thought that if I just stayed at the company, it was likely to be a boring and slow corporate path. If I woke up when I was 35 or 45 and decided to go off on my own, it would be much more complicated. I would likely have a wife and kids by then, which would make it harder to break loose and make a risk-free bet. Being 25 and single, I had available at least one risk-free bet.

My game plan was very simple. I had an arbitrage-based business model. The value proposition was leveraging India’s deep expertise and available talent in client-server computing to satisfy the deep shortage of talent in the Midwestern United States. I had $100,000 of capital available to me, and the business was already producing revenue and some profit when I resigned from Tellabs. I knew that with the first two customers on board, generating real revenue and profits, the downside was very limited. It was classic “Heads, I win; tails, I don’t lose much.”

The Dhandho Framework

1. Focus on buying an existing business.
2. Buy simple businesses in industries with an ultra-slow rate of change.
3. Buy distressed businesses in distressed industries.
   1. Never count on making a good sale. Have the purchase price be so attractive that even a mediocre sale gives good results.
4. Buy businesses with a durable competitive advantage – the moat.
5. Bet heavily when the odds are overwhelmingly in your favour.
6. Focus on arbitrage.
   1. While arbitrage spreads are small and sometimes only available for fleeting moments, they are virtually risk-free and it is free money while it lasts.
   2. Anytime you’re playing an arbitrage game, you end up getting something for nothing.
7. Margin of Safety: buy businesses at big discounts to their underlying intrinsic value.
8. Look for low-risk, high-uncertainty businesses.
   1. Dhandho entrepreneurs first focus on minimizing downside risk. Low-risk situations, by definition, have low downsides. The high uncertainty can be dealt with by conservatively handicapping the range of possible outcomes.
9. It’s better to be a copycat than an innovator.
   1. Innovation is a crap shoot, but lifting and scaling carries far lower risk and decent to great rewards.

Papa Patel’s, Manilal’s, and Mittal’s moats were created by being the lowest-cost producer. Branson only ventures into a business after he’s convinced it has a wide and deep moat. Part of the moat comes from extending his brand, part of it from creating a truly innovative offering, and the rest from brilliant execution.

The Dhandho framework:

• Invest in existing businesses.
• Invest in simple businesses.
• Invest in distressed businesses in distressed industries.
• Invest in businesses with durable moats.
• Few bets, big bets, and infrequent bets.
• Fixate on arbitrage.
• Margin of safety—always.
• Invest in low-risk, high-uncertainty businesses.
• Invest in the copycats rather than the innovators.

Dhandho 101: Invest In Existing Businesses

Having an ownership stake in a few businesses is the best path to building wealth.

With no heavy lifting required, bargain buying opportunities, ultra-low capital requirements, ultra-large selection, and ultra-low frictional costs, buying stakes in a few publicly traded existing businesses is the no-brainer Dhandho way to go.

Dhandho 102: Invest In Simple Businesses

The intrinsic value of any business is determined by the cash inflows and outflows – discounted at an appropriate interest rate – that can be expected to occur during the remaining life of the business.

The Dhandho way to deal with this dilemma is painfully simple: Only invest in businesses that are simple – ones where conservative assumptions about future cash flows are easy to figure out. What businesses are simple? Well, simplicity lies in the eye of the beholder.

Simplicity is a very powerful construct. Henry Thoreau recognized this when he said, “Our life is frittered away by detail . . . simplify, simplify.”

Einstein noted that the five ascending levels of intellect were, “Smart, Intelligent, Brilliant, Genius, Simple.”

The psychological warfare with our brains really gets heated after we buy a stock. The most potent weapon in your arsenal to fight these powerful forces is to buy painfully simple businesses with painfully simple theses for why you’re likely to make a great deal of money and unlikely to lose much. I always write the thesis down. If it takes more than a short paragraph, there is a fundamental problem. If it requires me to fire up Excel, it is a big red flag that strongly suggests that I ought to take a pass.

Dhandho 201: Invest In Distressed Businesses In Distressed Industries

Human psychology affects the buying and selling of fractions of businesses on the stock market much more than the buying and selling of entire businesses.

All we need to do is to first narrow the universe of candidate businesses down to ones that are understood well and are in a distressed state.

How do we get a list of distressed businesses or industries? There are many sources, but here are six to begin with:

1. If you read the business headlines on a daily basis, you’ll find plenty of stories about publicly traded businesses.
2. Value Line publishes a weekly summary of the stocks that have lost the most value in the preceding 13 weeks.
3. There is a publication called Portfolio Reports that is published monthly. It lists the 10 most recent stock purchases by 80 of the top value managers.
4. If you’d like to avoid the subscription price tag for Portfolio Reports, then much of that data can be gleaned by looking directly at the public filings (e.g., SEC Form 13-F) that institutional investors have to make. These can be accessed on the EDGAR system.
5. Take a look at Value Investors Club.
6. Joel Greenblatt’s www.magicformulainvesting.com.

Between these sources, there is now a plethora of candidate distressed businesses to examine. How can we ever get our arms around all of them? Well, we don’t. We begin by eliminating all businesses that are either not simple businesses or fall squarely outside our circle of competence.

Dhandho 202: Invest In Businesses With Durable Moats

Capitalists strive hard to capitalize on any opportunity to make outsize profits. The irony is that, in that pursuit, they usually destroy all outsized profits. But, every once in a while a business with a secret sauce for enduring outsize profits emerges.

How do we know when a business has a hidden moat and what that moat is? The answer is usually visible from looking at its financial statements. Good businesses with good moats, like our barber, generate high returns on invested capital. The balance sheet tells us the amount of capital deployed in the business. The income and cash flow statements tell us how much they are earning off that capital.

It is virtually a law of nature that no matter how well fortified and defended a castle is, no matter how wide or deep its moat is, no matter how many sharks or piranha are in that moat, eventually it is going to fall to the marauding invaders. Throughout history, every great civilization and kingdom has eventually declined.

We are best off never calculating a discounted cash flow stream for longer than 10 years or expecting a sale in year 10 to be at anything greater than 15 times cash flows at that time (plus any excess capital in the business).

Dhandho 301: Few Bets, Big Bets, Infrequent Bets

Kelly Formula: Edge/odds = Fraction of your bankroll you should bet each time

if we can determine the intrinsic value of a given business two to three years out and can acquire a stake in that business at a deep discount to its value, profits are all but assured. In determining the amount to bet, the Kelly Formula is a useful guide.

We can be off on the probabilities. Anytime we are trying to compute odds for the way the future of a given business is likely to unfold, it is, at best, an approximation. We try to adjust for this by ascribing conservative odds.

Since all odds are based on our circle of competence and our view of how the world works, it is error-prone.

Looking out for mispriced betting opportunities and betting heavily when the odds are overwhelmingly in your favour is the ticket to wealth. It’s all about letting the Kelly Formula dictate the upper bounds of these large bets. Further, because of multiple favourable betting opportunities available in equity markets, the volatility surrounding the Kelly Formula can be naturally tamed while still running a very concentrated portfolio.

Dhandho 302: Fixate On Arbitrage

Arbitrage is a powerful construct and a fundamental tool in the arsenal of any value investor. With arbitrage, we get decent returns with virtually no risk.

4 types of arbitrage:

1. Traditional commodity arbitrage
2. Correlated stock arbitrage
3. Merger arbitrage
4. Dhandho arbitrage

Low risk, high uncertainty, and arbitrage are the core fundamentals of how good entrepreneurs operate.

Sniffing out an available arbitrage opportunity is what prompts entrepreneurs to embark on journeys that have led to the creation of compelling businesses. 

All Dhandho arbitrage spreads will eventually disappear. The critical question is: How long is the spread likely to last and how wide is the moat? As stated by Mr. Buffett:

The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage.

The difference between Dhandho and traditional arbitrage lies mainly in duration and width of the spread. With Dhandho, this spread is likely to last for many years, and the returns an investor can garner by capturing this spread can be enormous.

Dhandho 401: Margin Of Safety – Always!

Graham’s genius was that he fixated on these two joint realities:

1. The bigger the discount to intrinsic value, the lower the risk.

2. The bigger the discount to intrinsic value, the higher the return.

Whenever I make investments, I assume that the gap is highly likely to close in three years or less. My own experience as a professional investor over the past seven years has been that the vast majority of gaps close in under 18 months.

Graham’s fixation on margin of safety is understandable. Minimizing downside risk while maximizing the upside is a powerful concept. It is the reason Mr. Buffett has a net worth of over $40 billion. He got there by taking minimal risk while always maximizing returns. Most of the time, assets trade hands at or above their intrinsic value. The key, however, is to wait patiently for that super-fast pitch down the center.

Dhandho 402: Invest In Low-Risk, High-Uncertainty Businesses

Always take advantage of a situation where Wall Street gets confused between risk and uncertainty. The results will usually be quite acceptable.

We always have a free upside option on most equity investments when competent management comes up with actions that make the bet all the more favourable.

Rapidly changing industries are the enemy of the investor.

With a 6 percent coupon and buying for 18 cents on the dollar, you’d get all your money back before the company ran out of cash. Even if the investor knew nothing about Walter Scott Jr., there was no downside to the situation.

A high dividend yield is sometimes indicative of a stock being undervalued. So, like low P/E or 52-week low lists, it’s a worthwhile screen.

In investing, all knowledge is cumulative. I didn’t invest in Knightsbridge, but I did get a decent handle on the crude oil shipping business. My Knightsbridge research had highlighted that there is a feedback loop in the tanker market.

The trick is to only buy seats in those theaters where there is a mass exodus and you know that there is no real fire, or it’s already well on its way to being put out. Read voraciously and wait patiently, and from time to time these amazing bets will present themselves.

Dhandho 403: Invest In The Copycats Rather Than The Innovators

Innovation is a crapshoot, but investing in businesses that are simply good copycats and adopting innovations created elsewhere rules the world.

In 1954, he bought the rights to the name and know-how, and he scaled it, with minimal change. Many of the subsequent changes or innovations did not come from within the company with its formidable resources—they came from street-smart franchisees and competitors.

The flagship product that allowed Microsoft to scale exponentially wasn’t developed in-house. It was lifted from Seattle Computer. They have looked for customer validation of someone else’s innovation before embarking on their own. It is a very powerful strategy.

Good cloners are great businesses.

Despite our policy of candour, we will discuss our activities in marketable securities only to the extent legally required. Good investment ideas are rare, valuable and subject to competitive appropriation just as good product or business acquisition ideas are.

Returns are likely at their highest when you have a single, focused, value investor at the helm.

If you carefully study the most successful businesses around, you’ll notice that much of it has been lifted and scaled by great executers

Abhimanyu’s Dilemma – The Art Of Selling

Selling a stock is a more difficult decision than buying one – thus the need for a robust framework.

The decision to enter, traverse, and finally exit a chakravyuh is akin to figuring out when to buy, hold, and sell a given stock. The lesson Abhimanyu has for us is to have a crystal-clear exit plan before we ever think about buying a stock.

Here are seven questions that an investor ought to be thinking about before entering any stock market chakravyuh:

• Is it a business I understand very well – squarely within my circle of competence?
• Do I know the intrinsic value of the business today and, with a high degree of confidence, how it is likely to change over the next few years?
• Is the business priced at a large discount to its intrinsic value today and in two to three years? Over 50 percent?
• Would I be willing to invest a large part of my net worth into this business?
• Is the downside minimal?
• Does the business have a moat?
• Is it run by able and honest managers?

One should only consider buying if the answer to all seven is a resounding yes.

If not, take a pass on entering this chakravyuh. There will be better chances in the future.

A critical rule of chakravyuh traversal is that any stock that you buy cannot be sold at a loss within two to three years of buying it unless you can say with a high degree of certainty that current intrinsic value is less than the current price the market is offering.

Our future estimate of intrinsic value is likely a range between $200,000 and $1,000,000. The gas station cannot be sold at a loss today for three reasons:

1. It has been less than two to three years since we bought.
2. We are unable to come up with a realistic intrinsic value with a very high degree of certainty.
3. Present offered price is well below our conservative estimate of present intrinsic value.

The only time a stock can be sold at a loss within two to three years of buying it is when both of the following conditions are satisfied:

1. We are able to estimate its present and future intrinsic value, two to three years out, with a very high degree of certainty.
2. The price offered is higher than present or future estimated intrinsic value.

The key to being a successful investor is to buy assets consistently below what they are worth and to fixate on absolutely minimizing permanent realized losses.

Most clouds of uncertainty will dissipate in two to three years. The three-year rule also allows us to exit a position where we are simply wrong on our perception of intrinsic value. If we didn’t have an out and always waited for convergence to intrinsic value, we may have an endless wait. There is a very real cost for waiting.

It is very hard to make up the lost non-compounding years. We must be patient, but not wait endlessly. My conclusion is that two to three years is just about the right amount of patience for losers to fix themselves.

The Magic Formula suggests that you buy stocks that you know nothing about and hold for 12 months. It makes logical sense that you’d want to allow a longer holding period on businesses you actually understand well.

Always be cognizant of the time value of money. It is very hard to make up the lost non-compounding years.

Given the cyclical nature of the business, the odds were decent that things might get better as demand came back. We had a significant unrealized loss, less than two years had passed, and intrinsic value was tough to figure out. These are classic signs of being engaged in a furious battle in the heart of the chakravyuh. To have a shot at coming out alive, the answer was obvious – do nothing.

The question again was what should I do? Two years had passed, we were still underwater. Intrinsic value was becoming clearer, and the company’s turbo growth path suggested that the original thesis might just play out – albeit with a significant time delay. I estimated that intrinsic value was likely well over $11 per share. It looked like the market was unwilling to reward USAP for its brighter future today. It was taking a wait-and-see attitude.

Any time a business spends $2.5 million on an asset and will earn $3+ million from that expenditure in the first year alone, you do not need Excel to figure out how awesome that is for shareholders in enhancing intrinsic value.

After three years, if the investment is still underwater, the cause is virtually always a misjudgment on the intrinsic value of the business or its critical value drivers. It could also be because intrinsic value has indeed declined over the years. Don’t hesitate to take a realized loss once three years have passed.

Within three years of buying, there is likely to be convergence between intrinsic value and price – leading to a handsome annualized return. Anytime this gap narrows to under 10 percent, feel free to sell the position and exit. You must sell once the market price exceeds intrinsic value. The only exception is tax considerations

The mantra always is “few bets, big bets, infrequent bets”—all placed when the odds are overwhelmingly in your favour. The Kelly Formula is an excellent guide to figuring out how many stocks to own. A “quarter Kelly” is a good way to go. If you can get to holding 5 to 10 diverse, well-understood value stocks in your portfolio, you’re well on your way to trouncing the markets and decimating one chakravyuh after another.

To Index Or Not To Index – That Is The Question

Greenblatt goes on to suggest that an investor ought to build a portfolio of about 25 to 30 of these Magic Formula stocks. He recommends buying five to seven of them every two to three months. After a given stock has been held for a year, it is sold and replaced with another one from the updated Magic Formula list. Greenblatt’s back-testing showed that these Magic Formula stocks have generated returns as high as 20 percent to 30 percent annualized.

And because the buy and sell decisions for each stock are so rigid and mechanical, there is no room for our poorly adapted, fear- and greed-driven brains to mess up our equity investing results.

The Magic Formula is a very good place to go hunting for fifty-cent dollar bills. We could keep it very simple, only analyzing Magic Formula stocks day in and day out, and become quite wealthy over time. I strongly recommend this approach. It is simple.

Here are eight other ponds where we are likely to find more of these fifty-cent dollars.

• The Value Investors’ Club (VIC) website is open to the public, and it is loaded with a plethora of fifty-cent dollars.
  • If an investor just analyzed stocks that are on the Magic Formula and have a VIC write-up, they are likely to do quite well.
• Subscribe to Value Line (or review it at a library). Study their “bottom lists” every week.
• Look at the 52-week lows on the New York Stock Exchange (NYSE) daily. Most stocks will be ones you’ve never heard of. Ignore these. Fixate on familiar names and then dig deeper on any that pique your interest.
• Subscribe to Outstanding Investor Digest and Value Investor Insight.
• Subscribe to Portfolio Reports.
• Another website that is free and can partly replace Portfolio Reports is Guru Focus.
• A sister publication of Value Investor Insight is Super Investor Insight.
• Attend the biannual Value Investing Congress.

If an investor runs a portfolio of 5 to 10 stocks and holds them for one to three years, he or she needs to come up with an investment idea or two just every few months.

Arjuna’s Focus: Investing Lessons From A Great Warrior

When something jumps out, focus intently on it until it’s either rejected as an investment or passes all the Dhandho filters and you make the investment. Do not make the fatal mistake of looking at five businesses at once. Learn all you can about the business that jumps out for whatever reason and fixate solely on it.