There wise ones bet heavily when the world offers them that opportunity. They bet big when they have the odds. And the rest of the time, they don’t. It’s just that simple.—Charlie Munger. To be a good capital allocator, you have to think probabilistically. In investing, there is no such thing as a sure bet. Even the most blue-chip business on the planet has a probability of not being in business tomorrow.
Fulbright: One other question and I will desist. When you find a special situation and you decide, just for illustration, that you can buy for $10 and it’s worth $30, and you take a position, and then you cannot realize it until a lot of other people decide it is worth $30, how is that process brought about—by advertising, or what happens? What causes a cheap stock to find its value?
Graham: That is one of the mysteries of our business and it is a mystery to me as well as to everybody else. But we know from experience that eventually the market catches up with value.
They all led to big instantaneous drops as panic and fear set in. Over time, as rationality prevailed, prices did recover to more rational levels.
The American Express Salad Oil Crisis
Buffett invested 49% of Buffett Partnerships’assets into American Express which was hit hard by the salad oil crisis cutting half the stock price. Buffett noticed that the intrinsic value of the company is higher and he placed the largest bet. Buffett generated three or four bagger return over three years. Dhandho is all about placing few bets, big bets, infrequent bets; and the Kelly Formula supports this hypothesis. This approach works exceedingly well in making passive investments in the stock market.
Kelly Formula suggests the maximum bet we ought to make, it optimizes the time it take a bettor to reach our wealth goals. At Pabrai Funds, Monish adjust for this by simply placing bets at 10 percent of assets for each bet. Investing is just like gambling. It’s all about the odds. Looking out for mispriced betting opportunities and betting heavily when the odds are overwhelmingly in your favor is the ticket to wealth.
Watch The Dhandho Investor Chapter 9 full summary here 👇:
https://youtu.be/T-nHTbUU3ls
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