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When I simulated that 100 people were participating and betting 20% of their account in each flip,Ĭlearly, using the betting size suggested by the Kelly formula is not for the faint of heart. I did a Monte Carlo simulation of this experiment but I use 20 tosses instead of 300. Try Google “Kelly criterion calculator multiple outcomes”, if you want to learn more and do some testing. The Kelly formula is calculated using the following equation: Well, according to Kelly, the answer is 20% of your total account during each flip, or There is an optimal amount to bet, and this can be calculated using the Kelly formula. Luckily, you won’t be one of them after this takeaway as, given the odds of an investment, If you repeat that with multiple bets like this, you are pretty much guaranteed to go broke at some point.Īn interesting study was made with a coin like this, where participants were asked to bet for 30 minutes, being able to place approximatelyĦ6% decided to bet on tails at some point during the experiments.
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You’re looking for a mispriced gamble, that’s what investing is.”Ĭlearly, you cannot risk your whole account on this coin flip, as there’s a solid 40% chance of losing it all. “We look for the horse with one chance in two of winning, I mentioned earlier that you must be willing to bet big when great opportunities present themselves. How much would you be willing to wager of your total $25 on this coin flip? Tails: Probability: 40%, payout: losing your bet. Heads: Probability: 60%, payout: doubling your bet. Imagine that you have $25 and that you’re asked to place a bet on a coin flip with the following probabilities and payouts: Mohnish Pabrai argues that it’s better to invest in the copycats rather than the inventors.īuying companies that are implementing previously proven business models can be very profitable.Įspecially if they are better at executing than the competitors. It’s better to be a copycat than an inventor.Risk and uncertainty are NOT the same thing.Īn investment can have a wide range of possible future outcomes,īut the risk of taking a large permanent loss investing in such opportunities, may still be very low. Look for low risk, high uncertainty businesses.There’s always a risk that you’re wrong – factor this in before buying. It’s Benjamin Graham’s margin of safety that Mohnish Pabrai is referring to here.ĭon’t buy anything in the market without this margin. We’ve talked about this many times before, have a look at my summary of The Intelligent Investor, for instance. Buy businesses with a big discount to their underlying value.It’s heads: I win, tails: I break even or win. The stock market is efficient, but only for most of the time.īet big when you have the odds, the rest of the time, you should sit still.Īn arbitrage is a situation in which there is a risk-free profit in the market, after transaction costs. Bet heavily when the odds are overwhelmingly in your favorĭon’t be afraid to bet big when you find the right opportunities.Buy businesses with a durable competitive advantageīeware of businesses that don’t possess a competitive advantage over other actors within the same industry.Ĭompanies that do not fulfill this may lose their profits rapidly, which is a terrible situation for you as the stock owner.“Be fearful when others are greedy, and greedy when others are fearful.” Buy distressed businesses in distressed industries.Otherwise you are speculating, not investing. Moreover you have to narrow your investing down to simple businesses, Will Facebook and Netflix exist 50 years from now? Well, most likely, we will probably have to eat and drink even then. Will Coca-cola and McDonald’s exists 50 years from now? By simple businesses, in industries with slow rate of changeĬhange is the enemy of investments.It’s the best performing one over longer time frames, and it is less risky than creating your own startup. The asset class that you’ll want to focus on is stocks. Nine principles that will guide you in making these heads: I win, tails: I don’t lose much, bets. It’s about investing only in opportunities where we can achieve the following asymmetry:Īlright, so how can I achieve this? It sounds too good to be true! It is possible to get high returns with low risk, and this is what Dhandho investing is all about.
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In The Dhandho Investor, a book written by Mohnish Pabrai, you will learn that this is not necessarily the case. If you have ever attended a class in finance, you probably recognized the idea that, to get higher investment returns, If you don’t already have the book, order the book or get the audiobook for free to learn the juicy details. Has The Dhandho Investor been gathering dust on your bookshelf? Instead, pick up the key ideas now. *** THIS IS A WORK IN PROGRESS – Please check back later ***