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Dhandho is a Gujarati word that translates to “endeavors that create wealth”; colloquially, it it used to simply mean “business”. Monish Pabrai applies this term to mean situations where there is low risk, and high uncertainty. 

“Heads I win, tails I don’t lose much.”

Pabrai's book, The Dhandho Investor, chronicles his journey as a  investor and describes the principles of investing he has picked up along the way. Perhaps most importantly, Pabrai provides a framework to conceptualize the difference between risk and uncertainty; concepts often confused by both individuals and organizations.

He advocates creating and finding investment opportunities where there is little or no downside (i.e. where your maximum exposure is limited), and uncertain pay offs (i.e.  where you could make either $1 or millions). The more bets of this nature you take, the greater your chances of success.

To put it mathematically:

In this scenario your absolute maximum loss is $100, while your absolute maximum gain is $9,900. Not a bad trade, right? $100 for the potential of making almost 10 times that amount?

Often in Dhandho scenarios, we don’t know what the upside is and we don’t know whether it will be $10,000 or $200,000. What matters is that there is sufficient volatility in the upside, and that our downside is mitigated and managed.

Figure 1.1 Dhandho bets visualized as a call option

Figure 1.1 Dhandho bets visualized as a call option

The Dhandho way of thinking helps you preserve your capital and allows you to increase the frequency of your bets. All of this builds experience, and hopefully builds your chances of success in the long term.

The title of this book is all you really need.

The beginning...