Business Moats:- The dhandho Investor Chapter 9

Hello friends, in today’s article, we see business moats from chapter 9 of the book the Dhandho Investor by author Mohnish Pabrai. In this chapter, we see investing in businesses with durable moats. By investing in this, you get a competitive advantage as compared to their competitor.

so let’s see how to find, that companies that have durable accounts.

Previous Chapter 8

Invest In Business with Durable Moats:-

Business Moat:- The dhandho Investor Chapter 9

In starting this chapter the author explains what is the moat, with his barbershop arbitrage

the author says, ” As we saw in the barbershop arbitrage example, our barber is initially the only game in town. he is thus able to charge significantly more than the barbers in the neighboring towns and make supernormal profits.

Capitalism is greed-driven, and as barbers in the other town, get word of the spectacular opportunities in town C, they rush to open up barbershops.

Over time, the price to get a trim in town C is no different from town A or Town B. 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.

take the example, of one of my favorite restaurants Chipotle. whenever I go there, there is usually a line all the way to the door. In spite of the fact that there is this long line and I live in southern California with a plethora of choices for Mexican food, I remain loyal to Chipotle. (Business Moat:- The dhandho Investor Chapter 9)

Why? Well partly it’s the fresh high-quality ingredients, partly it’s the tasty food, partly and ambiance, and partly the ability to precisely decide which ingredients I want and in what quantity.

All the other Mexican and fast-food restaurant owners in town are fully aware of the chipotle phenomenon. they hate it and want to do something about it, but they can’t – not easily anyway. It would be a significant uphill battle to replicate chipotle, I’m sure many will try, and eventually, a few might succeed but in the meanwhile chipotle is likely to continue to thrive for years on end.

when more players enter the market, they are likely to take customers away from other restaurants rather than chipotle.”

then author explains, the Chipotle business moat,

the author says, ” From a standing start just 13 years ago, Chipotle recently opened its 500th restaurant. it could easily grow 10 times or more.

Its present footprint, not to mention its enormous prospects overseas. Chipotle has a durable moat.

This moat allows chipotle to have the ability to earn supernormal profits. Best I can tell those profits are here to stay at least for the next decade or longer. (Business Moat:- The dhandho Investor Chapter 9)

There are businesses with deep moats all around US-American express. Coca-cola, H & R Block, Citigroup, BMW, Harley-Davidson, WD-40, Nabisco’s Oreo cookies- the list is endless.

There are businesses with shallow or nonexistent moats all around the US its well- Delta Airlines, General Motors, Cooper tires, encyclopedia Britannica, Gateway computers, and so on.”

then the author explains, how to find the moat, and most moats of companies are hidden

the author says, ” Sometimes the moat is hidden. take a look at Tesoro Corporation. It is in the Oil Refining business- which is a community. Tesoro has no control over the price of its principal finished good, gasoline, nonetheless, it has a fine Moat.

Tesoro’s Refineries are primarily on the west coast and in Hawaii. Refining on the west coast is a great business with a good moat.

There hasn’t been a refinery built in the United States for the past 20 years. Over that period. the number of refineries has gone down from 220 to 150, while oil demand has gone up about 2 percent a year. the average U.S. refinery is operating at well over 90 percent of capacity. (Business Moat:- The dhandho Investor Chapter 9)

anytime you have a surge in demand, refining margins Escalate because there is just not enough, Capacity. West Coast refiners also have a good moat because state EPA regulations in California and Hawaii are very stringent and require unique formulations.

Refining on the West Coast and Hawaii carries much higher margins than the rest of the country. A refiner in Texas can not easily serve the California market. the California refiner is the one that usually serves the California market, which means that when Tesoro has a refinery in California it has a very large captive market.”

then the author talks about how we know when a business has a hidden moat and what that moat is

the author says, ” In the overwhelming majority of businesses the various moats are mostly hidden or only in partial view. it takes some digging to get to the moat.

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, and the income and cash flow statements tell us how much they are earning off that capital. (Business Moat:- The dhandho Investor Chapter 9)

So If a chipotle, store costs $700,000 to open and it generates $250,000 a year in free cash flow, it’s a damn good business. Every three years it can take that cash flow and open another chipotle. when it starts franchising, the return on invested capital is exponentially higher.

throughout history, kings have caught to build heavily fortified castles with ever-widening and deeper moats. At the same time, the marauding invaders continued to attack unabated and endlessly improved the tools, techniques, and armies at their disposal to capture these prize castles, 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, eventually it is going to full to the Marauding invaders.

Throughout history, every great civilization and kingdom have eventually declined.”

then the author talks about the narrow and nonexistent moats

the author says, ” The business mentioned earlier as having borrow, or nonexistent moats, Delta, Gateway, General Motors, all had pretty formidable moats at one time. (Business Moat:- The dhandho Investor Chapter 9)

they have all eroded over time, just like the moat well-defended castle eventually falls into the enemy’s hand. Here is Charlie Mungers on it:-

Of the fifty most important stocks on the NYSE in 1911, today only one, general electric remains in business…. that’s how powerful the forces of competitive destruction are. over the very long term, history shows that the chances of any business surviving in a manner agreeable to a company’s owner are slim at best.   – Charlie Munger

There are no such things as a permanent moat. even such invincible, businesses today like eBay, Google, Microsoft, Toyota, and American Express will all eventually decline and disappear.

Some moats are more durable than others. Wells Fargo and American Express were founded over 150 years ago, and amazingly both their moats are as robust as ever today. amazingly, as an aside, both American Express and Wells Fargo were founded by the same person, Henry Wells.

But here is the dilemma: if you were picking stocks a century ago, it would have been virtually impossible to pick these two out of the larger available universe, the odds are very high that even if the ones you picked were the bluest of the blue chips, they would eventually wither away. (Business Moat:- The dhandho Investor Chapter 9)

In 1977, Arie de Geus Wrote a Fascinating book called the Living company.

Geus studied the life expectancy of companies of all sizes and was very surprised to find that the average fortune 500 company had a life expectancy of just 40 to 50 years.

it takes about 25 to 30 years from Formation for a highly successful company to Earn a spot on the fortune 500.

Geus found that it typically takes many blue chips less than 20 years after they get on the list to cease to exist. the average fortune 500 business is already past its prime by the time it gets on the list.

Even businesses with durable moats, don’t last forever thus when using the John Burr Williams Intrinsic Value formula, We ought to limit the number of years, we expect the business to thrive. 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 is times cash flows at that time ( plus any excess capital in the business.) (Business Moat:- The dhandho Investor Chapter 9)

so this is all about chapter 8 of the book the Dhandho Investor on Invest in business with durable advantages.

Bitcoin Story: Basic to advance

Hello friends, in today’s article, we see the Bitcoin story, and how it’s working on Blockchain Technology. so If you want to invest in bitcoin, before that you should know about this. Investing in Bitcoin is like investing in Gold, so there is nothing is produced by this investment.

Previous Articles on Bitcoin

Bitcoin and Blockchain Story:-

Hello friend, before understanding the bitcoin basic, you should understand, how money works, so let’s see first how money works.

There are two ways to hold money

  1. Physical cash
  2. With a Bank ( behalf of you they save your record)

Physical Cash:-

Having physical Cash, we got many problems. like, I want to send money to another country, I have to put money in bags and someone has to transfer this bag from one place to another place, again the risk of Robb that money. (Bitcoin Story: Basic to advance)

so to solve this problem, we  keep our money in the bank

With a Bank:-

While keeping money in Bank, we can avoid keeping money in our homes, and not be required to carry bags of money with us

This whole problem is for the bank.

Bank solve the physical cash problem but they bring the new problem about money. like

  1. you have to trust the bank,
  2. you don’t have full control over money as compared to having physical cash.
  3. We have to follow banks rules
  4. We have to pay fees to the bank
  5. We can lose our data by cyber theft e.g. J.P.Morgan like banks also lose customer data.

Generally speaking people like Physical cash money, because we have full control over cash, and you can lend money to anyone or take money from anyone without knowing another third person.

But the problem is physical cash is not intangible because of this, we got a store and transport problem.

Bank money give Intangible so we don’t have to store money in our pocket, whenever you go, you can use money with a bank ATM. (Bitcoin Story: Basic to advance)

So we prefer intangibility convenience. then the question comes, is there any way in which We get the Intangibility + full control like Physical cash? This means the bank is no more intermediate.

A century before, there was like this currency available, that gives both intangibility and full control over cash, At Yap island Micronesia

Rai Stone is used as a currency stone. Rai Stone is a big stone they have the ring-type shape

Bitcoin Story: Basic to advance

Rai Stone is intangible and middle man free also.

1) Intangible, because, in a transaction, we don’t have to transfer Rai stone, or not affect where the Rai stone is.

Physical Cash actually we have to transfer, from one person to another. A century before, a Rai Stone transferring in Goat and that Boat was destroyed and go down the Sea. with this also, people now do the transaction on the basis by saying, they think, rai stone place there somewhere in the middle of the sea.

2) Middle man Free:- There is no central record for this rai stone transaction

So no one registers the transaction like the head of the villager, in that the record is about which Rai stone, is of which person. village people put records in their brains about which Rai stone is of which person.

So we can’t believe in a single person. So whoever the transaction happen, on whole village people know about their transaction and all village peoples key record of the transaction in our brain.

So this type of distributed ledger, we have the big benefits

  1. there is no middle man, which means no fee to pay
  2. No Froud Risj ( Because we all have the transaction record if one person have a record, then there is the risk of losing record, or stealing that record)
  3. No problem If the register is lost. ( so whole villagers are registered so there is no problem of Register (a record ) being lost.

Friends, Bitcoin is the Rio Stones in Internet Version. (Bitcoin Story: Basic to advance)

Bitcoin is intangible we can transfer bitcoin online, without any physical transfer

Middle man free so all transaction record is stored on Blockchain Technology. this technology is distributed to 10,000 computers, for now, you can think like, of this computer as a transaction register.

Now let’s see what are the Objective of bitcoin

Bitcoin Objectives:-

Direct online payments from one person to another person without a financial institution. ( without any middle man and with freedom)

Now we, see how we can invent bitcoin, step by step.

Now a day everyone has internet, so we have to remove the middle man ( like Bank)

So we have to develop some system like they can do bank works,

First step

1) Account Opening:-

The first step you have is to open an account, for bitcoin Transaction. Bank gives you a unique account number and keeps, a record of that number. so the bank can’t give the other person a number. (Bitcoin Story: Basic to advance)

then you generate the password for the same account number. without a bank we have to open an account for that we can choose a big random number digit.

so like type, this type of probability is zero to have the same account number of two people, and by using the one-way function corresponding, we can generate the password.

One way function means any given input can get output, but not get from output to input.

The hash Function we talked about in previous articles is also a one-way function. Like we talk about the public key, the private key is linked by a one-way function,

Actually, how is linked let’s understand,

we take 52 characters long choose a random number, so in that 52 characters, any alphanumeric number is long.

Means:- ABCD@07YZA etc

anything from 52 possibilities this random number is our private key, or say the password. If you pass this password in one way function on this some mathematical calculation steps and give an output.

so that is your public key

so this public key, you pass two or one-way function,

so come Public keys compress version, so this number you can say username/account number or address.

your account number is long about 26 -35 characters long. On this account number, people can send you bitcoin.

In the Bank case, we get the unique account number or username, then you generate the password. so in blockchain happen reverse, because, we pass this in one way function. (Bitcoin Story: Basic to advance)

if I use any random number, and I pass from a one-way function and get a password so any person can do this. that person does the same as me and passes through one function. Because the one-way function is going forward not reverse.

so that’s why we generate the first password and on that basis, we generate a username and no one can generate a password from a username.

so in cryptography, public key, the private key one was function concepts, without bank we generate account number and password,

Bank do other things likes,

  • Keeping Record of money:- How many transactions happen from one account to another account.

So we have to eliminate banks. so we can do anyone can become record keeper without anyone permission and can keep the transaction on computer. Just like in Ria stone village head does not keep all records, instead of that everyone’s villager has their record. (Bitcoin Story: Basic to advance)

Just like 10,000 computers keep a record of how much money have in different accounts. so for this, we avoid the risk of fraud and listing records because 10,000 computers register.

If any new transaction happens, then the record file in excel form submit all over the other computer.

Two ways to record Transaction:

1) Inventory Data record:-

Show in which account how much has to balance in the account. for example, Account number XYZ, has one million dollars.

2) Transaction Data Record:-

Record the transfer of money from one account to another account ( Transaction record not balance record)

In the Bitcoin register, have a record of Balance credit, debit process, you can know how much money have in their account.

Transaction data record, you not only just know account balance but also know how much bitcoin comes in our account. (Bitcoin Story: Basic to advance)

Transaction data has the following things in their process:-

  1. Account number of the sender
  2. Account number of receiver
  3. Number of bitcoins transferred
  4. digital signature of the sender ( to know about digital signature Click here)
  5. Transaction fees for executing a transaction

so now, you say, if in this system there is no middle man, so why are we pay the transaction fee

so let’s see

Any transaction before putting on the register, check this, is this transaction is valued ( validity check of transaction data)

For the Validity signature, we have to verify really that’s much bitcoin have in that account, and to transfer the Bitcoin.

so you think, we have to check this. you also know up to now, we do

  1. make the account number and password
  2. how much have money in the account in a different account and distribute this record to 10,000 computers.
  3. Keep the record in transaction form.

Now, let’s see how are transaction recorded on 10,000 computers.

If there is one computer, then we have to keep records line by line. so may happen some transactions got first and others get sometime later and take time to distribute between 10,000 computers

so transaction order has different for different people. We can’t control how much transaction order comes in per second.

so we control when to enter the register. like when transactions come, we can’t put in the register,m for that we need more transactions. When more transactions come, then we record to put on the register by developing Block 1 after 10 minutes. (Bitcoin Story: Basic to advance)

so now you ask a question, who creates a block every 10 minutes

so let’s see who make a block

For this purpose, they play the game like Ludo, in 10,000 computer

suppose four people playing Ludo, everyone has dice, the game is those people got first 6 number dice that person won means, that person can make the block.

In bitcoin, the game of playing name is Proof of Work i.e. Hash Puzzle

In block Present Transaction data have to pass through a hash function and find out hash value just in a dice game, those got first six they can same as in a hash game. You have to find the hash value that has in the game ( puzzle)

What’s value, they show the game of difficulty level? difficulty is number like 1,2,3,4,5

if game difficulty =1; valid hash value minimum one zero in their hash value e.g. 0f45jgdc77k6d

if game difficulty = 10; Valid hash Value= e.g. 0000000000 jshwda

So bigger difficulty needs bigger Zero, and that much hash puzzle becomes bigger difficult.

and that much time and the computer power required to solve.

In 10,000 people, in between them, one person gives Hash Value that satisfies the difficulty level so that person gets a chance to create the block.

so problem is, if first in Hash Puzzle is not solved then how second Hash Value we get Because Hash function always gives some result of given inputs. means, to find different hash values, you have to change input data.

Like, any transaction removed, and any transaction adds and changed transaction order, so In transaction don’t have to change, so for this in block give some empty space so you can add as your transaction. so for this activity called as Nonce.

if the hash function value is not coming as we need, then you can change Nonce and try again up to the right hash value come.

Mining:-Mining is the activity of creating a new block by solving the hash puzzle.

changing every time in Nonce, to get the right hash value is called mining. so those people who do this are called Minor.

minor is the person who does this, to solve the hash puzzle, required hard work not because, to solve the mathematical problem because of finding hash value, 100 and millions of times.

Computing power and electricity are mostly used by this process so why does anyone do this mining. so those creating blocks they got the reward means, those people solve firstly puzzle they get rewarded.

so who gives the reward and in which form so we don’t need a middle man so this system has its own currency. so by creating a block new bitcoin is generated just like print money. (Bitcoin Story: Basic to advance)

so this bitcoin is given to the person that creates a block. so this process is called block reward and inn that also include transition fees that person got who solve the puzzle.

In 2009, when bitcoin come, so in that time 50 bitcoin is given as block reward each of 2 lakh 10 thousand block

After four years, one block is created after 10 minutes

In 2013, 25 BTC means block reward is going half-percentage

In 2017, 12.5 BTC

In 2021, 6.25 BTC

so a Total of 21 million bitcoins created by this can happen in 2140.

Why block reward prize going half in value and in 2140 all thing ( bitcoin stop generating)

Block reward keep only for that reason is in this system. the starting people get a reward because, when new system start, there are not many transactions happen.

so transaction fees are also less. so when in system transaction increases, some as time come, the transaction fee is more for minor to compensate.

so solving hash puzzle get block rewards so people get greedy and increase computer hashing power, and create faster blocks.

so what can we do to create a block in 10 minutes that very quickly before 10 minutes? so for this purpose in the system some after time the difficulty level increases and after creating the 2016 block, the system check, blocks, are created before 10 minutes or same. (Bitcoin Story: Basic to advance)

if a block is created faster, ( means, people increases hash power) so the system increases difficulty level to need more time to solve the hash puzzle.

if block is created slower, the difficulty level decreases; the system speeds up

so how do we know the block is generated after to minutes, and in which order.

means how to do ordering blocks

Like, in the book have a page number, we know, which to read after this page.

just like that in bitcoin blocks, there is no number system for blocks

This means each block shares the previous block hash value, so just like that, each block refers to the previous block. so you say why we refer to difficulty, just give a simple number.

for this purpose have two reasons.

  1. If we give 1,2,3,4 number, then minor give up the previous block mining they go to higher number block mining.

e.g. if block 14 mining going on, then I know the next block is blocked 15. so number 15 using, I can start the next hashing.

so for this, we have to know the block 14 hash value to start before block 15.

so block 15 hash we start when we know block 14 very well

so Noone, a person can’t start next block or do having because block 15 start previous 14 block hash.

so Noone can make changes in block 14. if in number 14 blocks are linked with hash both thing process called as blockchain technology. (Bitcoin Story: Basic to advance)

so by using this system, we can eliminate(remove) the middle man, and also be trustworthy and no one can hack it or changes information.

People say, Bitcoin is made on the blockchain, but bitcoin’s main aim is to eliminate middlemen ( like banks) from transactions.

so by process of removing the middle man is called a blockchain. so blockchain is not a new technology, this technology come in the late 1990 to early 2000 technology.

Like a public key, private key, etc joining by developing technology. so that technology name is blockchain technology. so block created linked so what happens in the block so let’s inn block five thing happen.

A block has the following things:

  1.  previous block hash value
  2. transaction data hash value
  3. Nonce ( help to solve the hash puzzle)
  4. The difficulty level of the hash puzzle.
  5. timestamps:- so hash puzzle began

just like we check transaction validity same as we check block validity by checking previous block reference difficulty level is good or bad as we decided timestamp is right after block previous current block hash value solving the hash puzzle, or current difficulty level.

Gossip-style distribution of Block:-

so those people create blocks, they solve the hash puzzles in other languages and they send their block to 9,999 people to check and update their blockchain.

after creating a block, other persons at like superior, so if the block is found invalid, then reward is taken back from the block creator and other people start creating blocks to create the fastest block.

so those do very well, they only get a reward, if block is wrong, then in punishment reward is taken back, because creating a block, a computer chip is used to they become week after using it. ( require expenses) and light bill needs and other people check your work so the person in spite of fear, they do the right work,

so this 10,000 computer ( person), so these people work by their own interest, this person called as nodes.

So all system is own this principle majority nodes ( people) are very honest and only work for reward. (Bitcoin Story: Basic to advance)

After creating a block, other nodes, check that block, and update send in form of Gossip-style just like if i want to share something, I can share with my friend, and my friends tell their friends,  so this type my thought spread to all people.

so this type of block also spread.

Longest-Chain rule:-

so lots of people creating blocks,s so two people can come in first means same time two people create blocks this may happen.

so by happening this, in the chain, the branches start. if any minor get two valid blocks come at a time. so his opinion, which block, they can create next block.

But transaction data have to be one version. so this does not happen in the first history, some have other history and others have another history. so which history is right, this problem comes.

so for this purpose, blockchain follows the longest chain. means those chains have a maximum block that’s blockchain is right if those chains don’t have longest chain history, that block called an orphan block.

The longest chain is called an official chain because by developing that chain the maximum computing power is spent.

So orphan blocks transaction put again in a new block, and link to the longest chain, to execute this and to become history part. so the longest chain rule can also use for the wrong purpose.

like if I develop a new chain, that is longest than the official chai, so the official chain becomes orphan and my new chain becomes the official chain.

the old chain transaction is not considered, so double spending can do means the same money spend twice to buy things

e.g. if I buy clothes and pay the payment in bitcoin, my transaction creates in one block, so I do the same parallel payment with the same bitcoin, and I add more blocks on that transaction. (Bitcoin Story: Basic to advance)

my old transaction, that gives, to the shopkeeper, that transaction come in the orphan block so they did not consider the transaction. so for again system goes to process and refer to the longest chain, and I sent bitcoin to another address, so my transaction is failed, so I got my clothes and money get back.

so advise this, before giving clothes, we have to add at least 5 blocks should be created on our payment blocks, because of this, the new chain development required maximum hashing power. so that money we creating the other new chain required more money.

so developing a big new chain than the official chain is not easy work. so for that, you have to solve the fast puzzles, and also solve puzzles for old blocks also.

to develop this, we required world’s power of at least more than 50% so doing this called 51% attack

This means, if you have 51% worlds power then you can develop in long-chain, but to buy 51% hash power required more money, which means more expense so less expensive is to buy bitcoin.

so 51% attacks are possible in small cryptocurrencies because many people are not included, and do not have maximum hashing power. (Bitcoin Story: Basic to advance)

final last thing, in cryptocurrency, cryptography is used maximum. so whatever currency develop is called cryptocurrency money.

so this is the story of bitcoin.

Good Business to Invest in Distressed business

Hello friends, in today’s article we see chapter 8 of the book the Dhandho Investor author by Mohnish Pabrai, In this chapter the author explains, we should invest in distressed businesses, which is a good business to invest in. so let’s start to understand distressed business in distressed industries.

Previous Chapter 7

Dhandho 201:- Invest In Distressed Business in Distressed Industries

Good Business to Invest in Distressed business

In starting this chapter the author explains, how efficient market theories works and how to affect people’s opinion on that. so let’s see one by one

the author says, ” Efficient market theorists (EMTs) tell us that all known information about a given publically traded business is reflected in its stock price.

then they proclaim that there isn’t much to be gained by being a securities analyst and trying to figure out the intrinsic value of a given business. and with frictional costs thrown in, the EMTs believe stock picking is not just a zero-sum game, but rather a negative-sum game. (Good Business to Invest in Distressed business)

Here are Mr. Buffett’s replies to them.

I’d be a bum on the street with a tin cup if the markets were always efficient investing in a market where people believe in efficiency is like playing bridge with someone who has been told it doesn’t do any good to look at the cards.

It has been helpful to me to have tens of thousands of students turned out of business schools taught that it didn’t do any good to think.

Current financial classes can help you to do average. … Warren Buffett

Mr. Buffett has been Cherry-picking stocks for 56 years and from a standing start has a fortune valued at over $40 billion today.

nonetheless, I mostly agree with the EMTs. Stock prices, in most instances, do reflect the underlying fundamentals, trying to figure out the variance between prices and underlying intrinsic value, for most businesses, is usually a waste of time.

The market is mostly efficient. however, there is a huge difference between most and fully efficient. it is this critical gap that is responsible for Mr. Buffett not being a street corner bum.”

then the author explains, how Warren Buffett writes a wonderful section on EMTs.

the author says, ” Buffett’s 1988 letter to shareholders of Berkshire Hathaway has a wonderful section on EMTs. I strongly recommend reading it.

All the shareholder’s letters are archived on the Berkshire Hathaway website and they are a treasure trove of wisdom. about EMTs Buffett commented: observing correctly that the market was frequently efficient, (academics and wall street pros) went on to conclude incorrectly that it was always efficient, the difference between these propositions is night and day.   

-Warren Buffett

The market isn’t fully efficient because humans control its action-driven pricing mechanism. Humans are subject to vacillating between extreme fear and extreme greed. When humans, as a group, are extremely fearful, the pricing of the underlying assets, is likely to fall below intrinsic value; extreme greed is likely to lead to exuberant pricing. (Good Business to Invest in Distressed business)

If a business owner is extremely pessimistic and fearful about the future of his business and decides to sell it, it is likely to take him several months to get a sale consummated.

In the meanwhile, the circumstance causing the fear may have abated or, more likely, rational thinking is likely to have prevailed over time.”

then author explains, how individual investor mindset work in the market

the author says, ” In the case of the stock market, an individual investor in the same doom and gloom mindset would likely have uploaded his entire position in a few minutes.

Hence, stock prices move around quite a bit more than the movement in underlying intrinsic value. Human psychology affects, the buying and selling of fractions of businesses on the stock market much more than the buying and selling of an entire business.

Mr. Market, a creation of Benjamin Graham, lives in the stock market and is a very hyperactive and moody character. He’s buying and selling tiny fractions of several thousand businesses every few seconds.

The price at which Mr. market buys or sells is not based on the intrinsic value of the underlying business. It is determined by his mood. changes in his mood immediately result in prices changes.

Mr. Market’s Pari-mutuel approach to setting prices could not be more different from the way prices are determined for the sale of the entire business with the rapid-five trading of thousands of securities, every once in a while a few stocks might have a great deal of bad news, come out. (Good Business to Invest in Distressed business)

This sometimes leads to extreme fear and the wholesale unloading of these stocks, but when you sell stocks, there has to be a buyer at the other end. the buyer is looking at the same bad news as you are.

the only way such a sale gets consummated is at a deeply distressed price. Papa Patel, Manilal, and Mittal all made their fortunes by a fixation on buying distressed businesses.

Most of the time they did it when the entire industry was severally wounded- the motel industry right after 9/11 or the bankruptcy-ridden steel industry in 1980, and 1990.

The advantage we have over them is that our playing field is much larger; there are thousands of stocks whose prices wiggle around all day long.

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

then the author gives the 6 points that help us to find out the distressed business.

the author says, ” 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. Many of these news clips reflect negative news about a certain business or industry. for example, Tyco’s stock collapsed when the Dennis Kozlowski scandal was front and center. Martha Stewart’s prison sentence clabbered that stock. More recently, Mr. Spitzer’s adventures with H and R block have led to significant declines in its stock prices. these were all headline stories.
  2. Value line publishes a weekly summary of the stocks that have lost the most value in the proceeding 13 weeks. it is another terrific indicator of distress. this list of 40 stocks routinely shows price drops of 20% to 70% over that period. the ones with the largest drops are likely the most distressed. It also has a summary every week of the stocks with the lowest price to earnings ratio (p/e), widest discount to book value, highest dividend yield, and so on. Not all these businesses are distressed, but if a business is trading at a p/e of 3, it is worth a closer look.
  3. there is a publication called portfolio report (www.portfolioreports.com) that is published monthly it lists the 10 most recent stock purchases by 80 of the top value managers. it gleans this information from the various filings that institutional investors are required by laws to make, portfolio lists the buying patterns of such luminaries as Seth Klarman of Baupost, Lou Simpson or Geico, Marty Whitman of Third avenue, Peter Cundall of the Cundall group, Bruce Sherman of private capital management, and Warren Buffett. these managers aren’t 100% focused on distressed situations, but they are focused on value. Distressed situations are a subset of value investing so some of their investments fall into the distressed category. (Good Business to Invest in Distressed business)
  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 ( HTTP://access.edgar-online.com) Alternatively www.nasdaq.com, provides much of the data in condensed form. to get to the data, on the Nasdaq.com main page enter the anyone ticker symbol of a holding you think one of the values investing stars hold. I know Marty Whitman of Third Avenue has Owned Teson Ranch (TRC) for many years, so enter TRC and click on ” Infoquarters” then click ” holding/insiders” then click on ” Total Avenue Management ” and You get a listing of virtually everything the third avenue owns in U,S, stocks, you can do a google search to get the name of the one ticker you need. e.g. If i enter ” Longleaf 13F ” into the google search field, i get links to many of its holding. I can use anyone ticker on Nasdaq.com to get to virtually all its U.S. Holdings.
  5. take a look at Value investors club ( VIC; www.valueinvestorclub.com) it is a wonderful website started and managed by Joel Greenblatt of Gotham capital. Greenblatt has perhaps the best-audited record of any unleveraged investor on the planet over the past 20 years- a compounded annualized return of 40% we delve more into Greenblatt and his Dhandho approach later in the book. Value investor club has about 250 members by presenting a good investment idea. these members are required to post at least two ideas a year. the quality of these ideas is decent as they are peer-rated. If a member presents shoddy ideas a year. He or she is likely to lose membership privileges. Every week the best ideas ( judged by VIC management) get $5000. the primary benefit of membership is the ability to access ideas in real-time. however, as a guest, you can access the same content with a 2-month delay. it is very much worth looking through VIC for distressed situations. Start with the highest-rated ideas and work downward from there. (Good Business to Invest in Distressed business)
  6. Last, but certainly not least, please read the little book that beats the Market by Joel Greenblatt. after reading the book, visit: www.magicformulainvesting.com Like Portfolio reports or VIC, not all the stocks on the magic formula, website are distressed, but a meaningful number are we delve further into the magic formula later. Between these sources, there are now a plethora of candidates distressed business to examine how can we ever get our arms around all of them? well we don’t, we begin by eliminating all business. that are either not simple businesses or full squarely outside our circle of competencies. what’s left is a very small handful of simple well-understand businesses under distress we are now ready to apply the areas o the Dhandho framework to the select group.

so this is all about the good business to invest in from chapter 8 of the book the Dhandho Investor

Beginner books on stock market in 2025

Beginner books on stock market in 2025

Hello friends, in today’s article we see Stock Market Beginner books that’s help you to become a successful investor. so let’s see one by one.

Warren Buffett Rules of Investing

Stock Market Books:-beginner books on stock market 2025

In this, there are so many books, available to get knowledge about the stock market. Some of these books is for those people, who want to be investors, not a trader. This book helps you to become a Value Investor.

Because, the richest person in the world, in investing is a value investor, if you want to be that rich, then you should follow this book to make you very very wealthy as a value investor.

Value investing is the best strategy to beat most other investment strategies, because, value investing is all about buying a business at a lower price.

In Benjamin Graham’s words, ( Dean of Value Investing) ” Buying a dollar, at 40 cents or 50 cents”

so guys, in my opinion, the following books are the of the best books to become a value investor, I learned a lot, from some of the book, summaries I post on this blog also. so let’ start

1) One Up On Wall Street by Peter Lynch:-beginner books on stock market

beginner books on stock market

This is one of the best books ever written on market, without any accounting language or big meaning. This book is very well written in clear English. In short, words say, if you read this book in front of 11 years kids, they will understand the what is the stocks market.(beginner books on stock market)

so this book is very very good for those who want to start an investor journey. In this book, each and every chapter is summarized on this website. so go and check it out. link:- Click here

now let’s see the second book, which also helps you to understand the Stock market’s basic psychology

2) Stocks to Riches By Parag Parikh:-beginner books on stock market

beginner books on stock market

Stocks to riches book is one of the best books to understand Investor behavior. This book helps you to avoid the mistakes that most investors do in the market, with emotion.

This book is a very easy and logical book on Investing. if you read this book then you get how value investors like Warren Buffett, Charlie Munger, Philip A. Fisher, Mohnish Pabrai, Seth Klarman, Guy Spier, etc play their insight game of investing and avoid the big mistakes in the market.

Hey, friend, if you are very much serious about the stock market, and making a lot of losses, then this book is for you. I definitely say, after reading this book, you almost avoid 99% of mistakes, that you doing before.

If you want to read this book’s summaries in chapter-wise, you can read this on this website. Link:- click here

let’s see the third most important book, to understand the business, and owing stocks is like owning a piece of business. so let’s see

3) The Dhandho Investor by Mohnish Pabrai:-

beginner books on stock market The Dhandho Investor is one of the books to understand the business, and easily find out the what is the worth of business.

This is book one of the best books on learning Value investing, and Analysis stocks, that’s going multi-bagger. Mohnish Pabrai is the Fund Manager, they Manage Pabrai, fund, in short, he says, about himself is that, he is the shameless cloner. (beginner books on stock market 2025)

And He clones the whole value investing game i.e. that’s come is compounding game. so I will talk very much about this author, but let’s understand what in this book,

This book, helps you to understand, there is a Low-risk High return strategy, and understanding the simple business, then you can bet heavily when winning points in your favor.

This book also talks about the intrinsic value of a business, with the Discounted Cash Flow method. so guys, if you want to learn about how business, works, and what mindset businessman have in that distressing situation, this book, give the university knowledge about the distressed business, with Calculated risks, that give the multi-multi-bagger return.

If you want to read the summaries chapter wise, you can read on this blog, Link:- Click here

now let’s see another book, that helps you to identify and analyze the Growth Stocks

4) Common Stocks and Uncommon Profits by Philip A. fisher:-

This is one of the rare books on analysis stocks. Warren Buffet also says, “I am 15% Philip A. Fisher and 85% Benjamin Graham.”

This means, whatever the wealth warren buffet generate, that’s 15% credits he gives to Philip A. Fisher, the author of this book,

so let’s see what in this book, first of all in this book, you learn the what is the growth company is, and growth companies are very rare, to find it out is very hard work.

In this book, the author gives the 15 points of the wonderful company, so you can easily identify this is the company that’s changed my life. (beginner books on the stock market 2025)

friends, in my opinion, everyone should read this book, to understand the what is the analysis of stocks, and what are the dividends psychology, and how retain investors react to Dividend, and investing in growth compnay.

If you want to read each and every chapter summary, you can read this on the website, link:- Click here

let’s see another best book on investing, that’ beginner can read,

5) A Little Book of Common Sense Investing by John C Bogle

This is one of the best books ever written on Index investing. those who don’t know about the index, for those,

The index is the list of companies that are big enough ( blue chip), so you can invest in the index means, you are investing in all these companies, let’s examples of the index fund is S & P 500 index fund, In India, Nifty, Sensex, etc.

In this book, the author explains, how know-nothing investors can beat highly professional investors with the help of Index Investing. John C. Bogle was the first investor, that gives the Index Investing strategy. He is the father of Index Investing.

On Index fund performance, warren Buffett also bets on the Index vs with the highly professional fund manager for 10 years times period.

Guess what, the best is won by warren Buffett, you can read this Millionaire Bet:- Click here

so from bets, the point is that we can get the awesome return from the Index investing, you can read more in this book on the index, buy this book from the above image link.

there are so many books available as a beginner Investor, but I read above these books, I think this book, everyone should read to get a basic idea of investing.

 

Most of the people thin, how many books we see read as beginner, in my opinion, at least you should read 10 best on any area to learn basic of that area. (beginner books on the stock market 2025)

so remaining books, I will also update with this post.

Intrinsic Value of Simple Businesses

Hello friends, in today’s article we see the intrinsic value of simple businesses, and how it is calculated from the book ” the Dhanndho Investor ” Chapter 7. In this chapter the author Mohnish Pabrai gives the intrinsic value of any business, to help in investing in simple businesses.

so let’s start, with how to invest in simple businesses.

Previous Chapter 6

the Dhandho Investor:- Chapter 7 (Intrinsic value)

Intrinsic value

in this author explain, how we can invest in any business by knowing its intrinsic value. so let’s understand this concept

the author says, ” the advantage of buying a fraction of an existing business is pretty clear, but before we buy, we must know its intrinsic value. how else would know it’s a good deal at a given price? What is the intrinsic value of a business is there a general formula? How do we figure it out?

Every business has an intrinsic value, and it is determined by the same simple formula. John Burr Williams was the first to define it in his theory of investment value. published in 1938.

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

the definition is painfully simple.”

then the author gives one example of a gas station, and how the intrinsic value of that gas station.

the author says, ” To illustrate let’s imagine that towards the end of 2006, a neighborhood gas station is put up for sale, and the owner offers it for $500,000. Further, let’s assume that the gas station can be sold for $400,000 after 10 years.

Free Cashflow- Money that can be pulled out of the business – is expected to be $100,000 a year for 10 years. let’s say that we have an alternative low-risk investment that would give us a 10% annualized return on the money.

Are we better off buying the gas station or taking our virtually assured 10% return? I used a Texas Instruments BA-35 calculator to do these discounted Cash Flow ( DCF) Calculations.

Alternatively, you could use excel. astable 7.1 demonstrate, the gas station has an intrinsic value of about %775,000

Table 7.1 Discounted Cash Flow (DCF) Analysis of the gas station

Year Free Cash Flow ($) Present Value ($) of Future Cash Flow ( 10%)
2007 100,000 90,909
2008 100,000 82,645
2009 100,000 75,131
2010 100,000 68,301
2011 100,000 62,092
2012 100,000 56,447
2013 100,000 51,315
2014 100,000 46,650
2015 100,000 42,410
2016 100,000 38,554
2017 Sale Price  400,000 154,217
Total 768,671

We would be buying it for $500,000 so we’d be buying it for roughly two-thirds of its intrinsic value. If we did the DCF Analysis it looks like Table 7.2

Table 7.2 Discounted Cash Flow ( DCF) Analysis of the 10 percent yielding low-risk alternative.

Year Free Cash Flow ($) Present Value ($) of Future Cash Flow ( 10%)
2007    50,000 45,454
2008     50,000 41,332
2009    50,000 37,566
2010    50,000 34,151
2011    50,000 31,046
2012    50,000 28,224
2013    50,000 25,658
2014     50,000 23,325
2015    50,000 21,205
2016      50,000 17,277
2017     Capital returned  500,000 192,772
Total 500,000

Not surprisingly the $500,000 invested in our low-risk alternative has a present value of exactly that – $500,000

Investing in the gas station is a better deal than putting the cash in a 10% yielding bond- assuming that the expected cash flows and sale price are all but assured.”

so above calculation, you see that buying the $500,000 is below the intrinsic value of a Gas Station. then the author gives the same example, in the stock market also.

the author says, ” The stock market gives us the price at which thousands of businesses can be purchased. We also have the formula to figure out what these businesses are worth, it is simple

When we see a huge gap between the price and intrinsic value of a given business – and that gap is in our favor – we can act and buy that business- and let’s take the of a well-known retail business, Bet, Bath, Beyond (BBBY).

I have to admit that I have never analyzed BBBY before. I have been to its stores a few times over the years, and it has been a pleasant experience.

As I write this, BBBY has a quoted stock price of $36 per share and a market cap of $10.7 billion.”

then the author calculates the intrinsic value of BBB Y’s company

the author says, ” What is BBBy’s intrinsic Value? let’s take a look at a few BBBY statistics a Yahoo finance, BBBY had $505 million in net income for the year ended February 28, 2005

Capital Expenditures for the year were $191 million and depreciation was $99 million. the ” Back of the Envelope.” net Free cash was about $413 million.

It looks like BBBY is growing revenues by 15% to 20% and net income by 25% to 30% a year. it also takes like it stepped up Capital expenditure (Opex) spending in 2005, let’s assume that free cash flow grows by 30% a year for the next three years and then grows 15 % a year for the following three years

then 10% a year after where. further, let’s assume that the business is sold at the end of that year for 10 to 15 times free Cash flow plus any excess capital in the business.

BBBY has about $850 million in cash in the business presently ( see table 7.3)

Table 7.3 Aggressive Discounted Cash Flow ( DCF) Analysis of Bed Bath and Beyond

Year Free Cash Flow ($MM) Present Value ($MM) of Future Cash Flow ( 10%)
Excess CASH    850
2006     523 475
2007    679 561
2008    883 663
2009    1016 693
2010    1168 725
2011    1340 758
2012     1478 758
2013    1625 758
2014      1787 758
2015     1967 758
2016 Sale Price 29,500 11,373
Total 19,130

so, the intrinsic value of BBBY is about $19 billion, and it can be bought at $10.7 billion. I’d say that’s a pretty good deal, but look at my assumptions – they appear to be pretty aggressive.

I’m Assuming no hiccups in its execution no changes in consumer behavior, and the ability to grow revenues and cash flows pretty dramatically over the years, what if we made some conservative assumptions?

We can run the numbers with any assumptions. the company has not yet released numbers for the year ended February 28, 2006, but we do have nine months of Data ( through November 2005)

We can compare November 2005 data to November 2004 data. Nine-month revenues increased from $3.7 billion to $4.1 billion from November 2004 to November 2005 and earnings increased from $324 million to $375 million. It looks like the top line is growing by 1% a year- going from 15% to 5% and its the final sale price is 10 times 2015 free cash flow the BBBY’s intrinsic Value looks like Table 7.4

Table 7.4 Conservative Discounted Cash Flow ( DCF) Analysis of Bed Bath and Beyond

Year Free Cash Flow ($MM) Present Value ($MM) of Future Cash Flow ( 10%)
Excess CASH    850
2006     469 426
2007    535 442
2008    604 454
2009    680 464
2010    751 466
2011    827 467
2012     901 462
2013    973 454
2014      1041 442
2015     1103 425
2016 Sale Price 11,030 4252
Total 9,604

Now, we end up with an intrinsic value of $9.6 billion.

BBBY’s Current Markt Cap is $10.7  billion. if we made the investment, we would end up with an annualized return of a little under 10%.

if we have good, low-risk, alternatives where we can earn 10%, then BBBY does not look like a good investment at all. so what is BBBY’s real intrinsic value?

My best guess is that it lies somewhere between $8 to $18 billion. And in these calculations, I’ve assumed no dilution of stock via option grants, which might reduce intrinsic value further.

With a present price tag of around $11 billion and an intrinsic value range of $8 to $18 billion. I’d not be especially enthused about this investment. there isn’t that much upside and a fairly decent chance of delivery under 10% a year. for me, it’s an easy pass.”

then the author comes the lesson of these examples,

the author says, ” We’re getting off track, the objective of this exercise is not to figure out whether to invest in BBBY stock. it is simply to demonstrate that while John Burr William’s definition of Intrinsic value is painfully simple, calculating it for a given business may not be so simple.

I think of BBBY as a fairly straightforward, low-tech, and simple business to understand. Even with its simplicity, we end up with a pretty wide range of its intrinsic value.

If we were to look at a business like Google. it starts getting very complicated. Google has undergone spectacular growth in revenues and cash flow over the past few years If we extrapolate that into the future, the business appears to be tracking at a big discount to its underlying and intrinsic value.

if we assume that not only is its growth rate likely to topper off, but that its core search business monopoly may be successfully challenged – by Microsoft, Yahoo, or some upstart – the picture is quite different. In that scenario, the current valuation of google might well be. many times it’s under intrinsic value.

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. Papa Patel bought a business that’s very easy to understand. the motel had a long history of revenues, cash flows, and profitability available for analysis.

From that data, it is not too hard to get a ballpark range of estimated cash flow that the motel is likely to generate in the future. Papa Patel also has a good handle on potential repairs and capital expenses that were likely to be required in the future based on the historical data and the condition of the property.”

then author explains the power of simplicity

the author says, ” simplicity is a very powerful construct. Henry Thoreau recognized this when he said, ” Our life Is frittered away by detail… simplify, simplify,” Einstein also recognized the power of simplicity, and it was the key to his breakthroughs in physics. he noted that the five ascending levels of intellect were, ” Smart, Intelligent, Brilliant, Genius, simple,”

for Einstein, simplicity was simply the highest level of intellect. Everything about, Warren Buffett’s investment style is simple. it is the thinkers like Einstein and Buffett, who fixate on simplicity who triumph. the genius behind E=mc2 is its simple elegance.

Everything about the Dhandho is simple, and therein lies its power. As we see in Chapter 15, the psychological warfare with our brains really gets heated after we buy stock.

The most potent weapon in your arsenal to fight these powerfully simple. there’s for why you’re to make a great, deal of money and unlikely to lose much. I always write the there 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.”

If you want to learn more about value investing, and finding great business, then buy this book from the following link

so this is all about the Intrinsic Value, from the book ” The Dhandho Investor” Chapter 7 written by author Mohnish Pabrai.

How much does it cost to Buy an Existing Business By Mohnish Pabrai

Hello friend, in today’s article we see how much it cost to buy an existing business from the book ” The Dhandho Investor” chapter 6 by author Mohnish Pabrai. In this chapter, the author explains that it’s better to buy an existing business than the Starting a new business.

so let’s understand the logic behind this

Previous Chapter 5

The Dhandho Investor:- Chapter 6 ( Buying an Existing Business)

How much does it cost to Buy an Existing Business By Mohnish Pabrai

In this chapter, the author explains that buying an existing business with the help of the stock market is way better than starting your own business. if you want to start a Value Investor career, then this chapter will change your life perspective to starting a business.

so let’s start with the author’s words,

the authors say, ” There are a plethora of asset classes you would choose to invest in – CDs U.S. Treasuries, Bonds, Stocks, Real estate, private businesses, gold, silver platinum, oil furniture. the list is endless.

If you examine returns from the Board of Stock Market indexes over the past one hundred years, it is pretty clear that stocks do better than virtually all other easily accessible asset classes.

the evidence overwhelmingly suggests that over the long haul, the best place to invest assets is in common stocks, let’s investigate this particular creation of mankind called the stock market.

The first stock market was formed in just 1790 in Philadelphia, followed by the new york stock exchange in 1972. A stock is seen by many as a cryptic piece of paper whose price wiggles around continuously, that’s one way to look at stocks. (How much does it cost to Buy an Existing Business By Mohnish Pabrai)

A far better way, suggested by Benjamin Graham, is to think of them as an ownership stake in an existing business. Papa Patel’s Motel is not publically traded on any stock exchange. if it were and you bought some of it, Now you and papa Patel are partners.”

then the author gives the Six big advantages of Stocks to buy the existing business that is traded on an exchange.

the author says, ” There are six big advantages that the stock market offers versus the buying and selling of an entire business.

  1. When you buy an entire business, as Papa Patel did, there is some serious heavy lifting required. you either need to run it or find someone competent who can this is no small task. Papa Patel did well but it required tremendous energy and dedication from his whole family for several years to make it work.
  2. When you buy a stock, you now have an ownership stake in the underlying business with a huge advantage- the business is already started and running. You can share in all the rewards of business ownership without much effort. the stock market enables you to own fractions of a few businesses of your choosing, over a period of your choosing with full liquidity to buy or sell that stake anytime with a few circles on Your computer. Humanity has given you a marvelous asset-compounding machine that’ is vastly superior to virtually all other alternatives and makes it all amazingly cheap and easy to use. Papa Patel does not have these advantages and we have a huge leg up on him with the stock market at our disposal. the key is to only participate in the stock market using the powerful Dhandho Investing Framework. (How much does it cost to Buy an Existing Business By Mohnish Pabrai)
  3. When humans buy or sell a whole business both sides have a good sense of what the asset is worth and a rational price is virtually arrived at. sometimes in these transactions, if the business or industry is distressed, buyers might get a bargain as papa Patel did, but those are anomalies. Sellers usually get to time these sales to their benefit. As a result, you typically end up with Fair to exuberant pricing. the stock market operates like the Pari-mutual in horse racing, the auction process occasionally leads to a wide divergence between the value of a business and its quoted market price in a few stocks. We can do very well by only placing an occasional bet when the odds are heavily in our favor. According to Charlie Munger:- If you stop to think about it, a pari-mutual system is a market everybody goes there and bets, and the odds change based on what’s bet. that’s what happens in the stock market.
  4. Buying an entire business- even a small/ neighborhood gas station or a laundromat- requires some serious capital. In the stock market, you can hitch your wagon to the future prospects of any business with what you have in your wallet right now. the ability to get started with a tiny pool of capital- and add to that pool over the year- is a huge advantage.
  5. There are thousands of publicly traded businesses in the united states, and you can buy a stake in any of them with a few mouse clicks. you can buy stocks in a plethora of other countries with ease as well. I’d estimate that the average individual investor could easily buy a stake in well over 100,000 businesses around the planet with a couple of brokerage accounts. In contrast, think about how many private businesses are on sale within 25 miles of your home, at any given time there is just no comparison.
  6. At the race track, the track owner takes 17% of every dollar bet. the frictional costs are very high. Even when you buy a tiny private business, transaction costs between the buyer and seller are usually between 5 percent to 10 percent of the purchase price which doesn’t include the considerable time and effort expended. You can buy and sell a stake in a publically traded company for under $10. with a $100,000 portfolio and even at a hyperactive 50 trades a year, frictional costs are 0.5% – and they keep getting lower ( as a percent) as the value of the portfolio rises over time.

ultra-low frictional costs are a huge business is the best path to building wealth. And with no heavy lifting required, bargain buying opportunities, ultra-low capital requirement, ultra-low frictional costs, buying stakes in a few publically traded existing businesses is the no-brainer Dhandho way to go.”

so you get the idea, the best way to make money or multiply money is to buy the existing business with a simple model with the help of the stock market.

so in the next chapter, we see which business we should invest in.

so this is all about how much does to buy a business existing business, from the book ” the dhandho Investor ” chapter 6

buy this book to learn more about value investing.

Picking Stocks By Mohnish Pabrai

Hello friends, in today’s article, we see the 9 principles of Investing in any business to get a multi-bagger return, by picking stocks on the Mohnish Pabrai Checklist. From the book ” The Dhandho Investor” written by Mohnish Pabrai. the 9 principles that constitute the Dhandho Framework, from chapter 5 of the book ” The Dhandho Investor”.

so let’s understand these 9 principles of the Dhandho framework.

Mohnish Pabrai First Business

The Dhandho Framework:-Picking Stocks By Mohnish Pabrai

Picking Stocks By Mohnish Pabrai

In starting this chapter, the author explains the previous chapter, how they define the Dhandho Framework, and get the maximum return, with very low risk.

so let’s start, the author says, ” On the Surface, the journeys are undertaken by Papa Patel, Manilal, Branson, Mittal and You’re truly are all pretty diverse. The roads we all took, however diverse, all led to a similar destination. Our journeys share a number of core principles. it is these nine principles that constitute the dhandho framework.”

then the author gives his own, checklist, that defines how is a great investor, gets continuously 26% return per year on his investment, continuously for the long term.

Friends, if you, understand this Dhandho Framework, then picking stocks, for your value investing purpose, is going to be very easy. so let’s see one by one What are the 9 principles of the Dhandho framework, we can use to pick stocks.

1) Focus on Buying an Existing Business:-Picking Stocks By Mohnish Pabrai

In this principle, the author explains, starting a business is more difficult than buying an existing business or pieces of business i.e. stocks.

in this principle some names are unknown to you, so for this, you can read their business in previous chapters, by clicking on their link to understand this principle

the author says, ” When Papa Patel ( Motel Patel Dhandho) decided to become an entrepreneur, he did not go out and start a brand new business. He bought an existing business with a well-defined business model and one with a long history of operations that he could analyze.

This is way less risky than doing a Startup. Manilal and Mittal did the same.”

to better understand this principle, read the above link article, to learn the power of focus on buying an existing business. (Picking Stocks By Mohnish Pabrai )

then the author gives the second principle of picking stocks in the Dhandho Framework.

2) Buy simple Businesses in industries with an ultra-slow rate of change:-(picking Stocks)

In this principle, the author explains, a simple business is giving more return than any complex business, which changes every time.

the author says, ” it is unlikely Papa Patel had ever even heard of Warren Buffett in the early 1970s. while being raised in environments that could not be more different, each reached the same conclusion: Buy a simple business with ultra-slow long-term change.

on this simple business, warrant Buffett gives the quote,

” We see change as the enemy of investments… so we look for the absence of change, we don’t like to lose money. Capitalism is pretty brutal. We look for mundane products that everyone needs.”

then the author explains, how the Motel business of Patels is great.

the author says, ” As long as humans travel long distances and have a need to sleep a refresh themselves, there will always be a need for motels and Hotels. My previous business, TransTech, appears to be in a rapidly changing industry, but it too is a simple low-tech business. (Picking Stocks By Mohnish Pabrai )

Motel business at its core is simply a service business. while information technology (IT) has changed dramatically over. the years, the underlying nature, and the economics of the services delivered are virtually the same.

IBM’s technology-centric business changes very quickly, but IBM Global services or Accenture’s  business stays in a pretty steady state,”

friends, this principle, is very simple but don’t take it casually, take it seriously

let’s see the third Principle

3) Buy distressed Businesses in Distressed Industries.

In this principle, the author explains, how we can get awesome opportunities, that can become multi-bagger. Because, those are distressed businesses, we are human, we don’t need trouble or any problem that may hurt us, so our brain, say, stay away from it. that’s why most financial fund managers, stay away from the distressed business,

so you can get the awesome opportunity. the author explains in a wonderful way, so let’s see

the author give Warren Buffett quotes and explain, how people get rich in distressed business

” Never count on making a good sale. have the purchase price be so attractive that even a mediocre sale gives good results.”    – Warren Buffett

“ The entrance strategy is actually more important than the exit strategy.” – Eddie Lampert

the author says, ” we discussed in Chapter 1, in early 1970, with the oil embargo, deep recession, and reduction in the consumer’s discretionary spending, highway motels were suffering.

They were being sold at very cheap prices- all based on their pathetic near-term prospects. Papa Patel knew he was buying during distressed conditions and getting a great price. (Picking Stocks By Mohnish Pabrai )

Manilal too made his move into the depressed travel industry right after 9/11.

Mittal loaded up on assets in severely distressed businesses in a severely distressed industry in severely distressed countries and geographies. That’s distressed to the power of three. No wonder he’s near the top of the Forbes 400.”

then author gives the Warren Buffett quote to understand this principle to become rich

While lecturing a group of students at Columbia University, at age 21, Buffett said,

” I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful.”       – Warren Buffett

the author says, ” while Papa Patel, Manilal, and Mittal were not in that closed room in 1957, they intrinsically understand that the very best time to buy a business is when its near-term future prospects are murky and the business is Hated and Unloved.

In such circumstances, the goods are high that an investor can pick up assets at steep discounts to their underlying value. these things, no one knows that better than Lakshmi Mittal.

4) Buy Business with a Durable Competitive Advantage- The Moat.

In starting this principle the author gives Warren Buffett’s quotes

” 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 advantages of any given company and above all the durability of that advantage the products and services that have wide, sustainable rewards to investors.            – Warren Buffett.

the author gives Papa Patel an Example to understand this principle

author says, ” With the fixation on running a low-cost operation, Papa Patel is able to charge much less than his competitors and still maintain healthy margins.

this leads to higher occupancy on a very perishable commodity that he is peddling- a motel room for tonight. this advantage has an enduring quality to it- are that has lasted several decades.

only when a Patel competes for head to head with another Patel is the advantage in Jeopardy. But with a large country and a small niche population, Patels are careful not to make their own lives, difficult by competing directly with another Patel. (Picking Stocks By Mohnish Pabrai )

Papa Patel’s, Manilla’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 the form from creating a truly innovative offering, and the rest from brilliant execution.

the IT Services business is a recurring revenue business. the relationships with clients and the knowledge of their business and systems are the deeply hidden moat in IT services.

As a company gets more familiar with a client’s business and technology infrastructure, the harder it is to be replaced by competitors and those recurring revenues keep pouring in.”

after this, the author gives the fifth principle of the Dhandho Framework.

5) Bet Heavily when the Odds are Overwhelmingly in your favor.

this is a very useful principle,

the author says, ” There was a chance that Papa Patel’s Motel could have failed. However, on two serial bets made over five years, the odds that both outcomes go against Papa Patel are slight.

Even when he loses both bets, since he did not have much to start with, his losses are pretty minimal. Societal Safety nets help him get back on his feet. But when he wins, and the odds are over 99 percent that he wings at least once, he gets over 20 times his money back. (Picking Stocks By Mohnish Pabrai )

it’s Classic ” Head, I win; Tails, I don’t lose much”

then author explains, how the great Investor thinker Charlie Munger use this principle.

the author says, ” Warren Buffett’s Business partner and Vice-Chairman of Berkshire Hathaway, Charlie Munger, uses horse racing Pari-mutuel betting system as one of his mental Models when approaching investing in the stocks market.

Unlike a casino, in horse racing, you are betting against other bettors. The house takes a flat 17% of the total amount wagered. Frictional costs, relative to the stock market, are very high, according to Munger.

to us investing is the equivalent of going out and betting against the Pari-mutuel system. We look for the horse with one chance in two of winning which pays you three to one. you’re looking for a mispriced gamble. that’s what investing is. and you have to know enough to know whether the gamble is mispriced. that’s value investing.

then author gives the 6th principle

6) Focus on Arbitrage

the author says, ” Arbritrase is classically defined as an attempt to profit by exploiting price differences in identical or similar financial instruments, for example, if gold is trading in London at $550 per ounce and in new york, at $560 per ounce assuming low frictional costs, on arbitrageur can buy gold in London and immediately sell it in new york, pocketing the difference.

Of course, as he or she ( and others) do these trades, the price spread collapses and the arbitrage opportunity eventually vanishes. 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. (Picking Stocks By Mohnish Pabrai )

As, Warren Buffett said, speaking at Columbia law school: Because my mother isn’t here tonight I’ll even confess to you that I’ve been an arbitrageur.

Anytime you’re playing an arbitrage game, you end up getting something for nothing. it’s always very good, in various forms, to play the arbitrage game because wherever a clear-cut arbitrage spread is available you just can’t lose.

Papa Patel is playing an arbitrage game as well. his arbitrage endeavors aren’t risk-free but they sure are ultra-low-risk and have many of the same characteristics of classic arbitrage.

then the author gives a wonderful example, you can read this in the book, and buy a book from the following link.

after reading this story you know the power of arbitrage.

let’s see principle 7th

7) Buy Businesses at big Discounts to their underlying intrinsic Value.

in this principle, the author explains the margin of safety

the author says, ” it is unlikely, that papa Patel ever read. the intelligent Investor book by Benjamin Graham or even heard of Graham’s ” Margin of Safety”

Nonetheless, Papa Patel Intrinsically Understands the concept of Minimizing downside risk, before ever looking at upside potential. if You buy an asset at a steep discount to its underlying value even if the future unfolds worse than expected the odds of a permanent loss of capital are low. (Picking Stocks By Mohnish Pabrai )

That’s exactly what Papa Patel did, e has a huge margin of safety when e bought the motel, according to Benjamin Graham.

….the function of the margin of safety is in essence that of rendering necessary an accurate estimate of the future.       – Benjamin Graham

 

now let’s see the 8th principle

8) Look for low-risk High-uncertainty Businesses.

in this, the author says, ” Papa Patel’s Motel purchase did not ave much risk associated with it. however, the outcome had significant uncertainty associated with it.

What if gas prices continued to stay high or the recession continued on? even in that scenario, Papa Patel would still be the low-cost provider.

He’d still be able to charge less and end up with higher occupancy. Even in the gloom and doom scenario, e comes out looking pretty good, if the economy booms and the gas price is moderate, He makes a killing profit. he has very low risk and relatively high uncertainty with the motel Investment.

Low risk and high uncertainty is a wonderful combination. It leads to severely depressed prices for businesses- especially in the Pari-mutuel system-based stock market. (Picking Stocks By Mohnish Pabrai )

Dhandho entrepreneurs first focus on minimizing downside risk. Low-risk situations by definition, have a low downside. the high uncertainty can be dealt with by conservatively handicapping the range of possible outcomes.

You end with the classic Dhandho Tagline: Heads, I win; Tails, I don’t lose much!

let’s see the last principle of the Dhandho Framework.

9) It’s better to be a Copycat than an Innovator

the author says, ” The first few Patels Paved the way for the thousands that followed. Papa Patel had seen a few of the earlier Patel’s latch on to buying small motets

In conversations, with these pioneers, the no-brainer business model becomes painfully clear to him. He did not set out to innovate. He simply followed the path laid out by his peers. the thousands of subsequent Patels who followed did not innovate either; Neither did Manilal.

I, too, got the seed of the idea for Transtech from my previous employer, Tellabs. they weren’t interested in pursuing it, and I saw tremendous potential- so I left Tellabs and lifted and scaled the idea.

Innovation is a crapshoot, but lifting and scaling carry for lower risk and decent to great rewards.”

this is all about the 9 principles of the Dhandho framework, which you can also use for Picking stocks.

let’s summarize The Dhandho Framework,

  • Invest in an existing business.
  • invest in a simple business.
  • invest in the distressed business in distressed industries.
  • Invest in business with durable moats.
  • Few bets, big bets, and infrequent bets,
  • Fixate on Arbitrage
  • margin of Safety-always
  • invest in low-risk, high-uncertainty business
  • Invest in the Copycat rather than the innovators.

TransTech company Dhandho by Mohnish Pabrai

Hello friends, in today’s article, we see the TransTech company case study, this company is started by Mohnish Prabrai. Mohnish Prabrai explains his own Company business framework to Add to the Flavors of Dhandho. In this article, we learn how the author starts his own company while doing the job, how they value their own company, as well as how much percent return they get on the company’s invested capital.

so let’s start.

Laxshi Mittal Steel Company information

TransTech Dhandho:-

TransTech company Dhandho by Mohnish Pabrai

The author ( Mohnish Prabrai) explains, how is he start a part-time company, by applying the simple Dhandho Framework, so let’s understand, in his words.

the author says, ” To add to the Flavors of Dhandho, let’s exercise my own Dhandho Experience.

When I founded my first business, TransTech, Inc., I had virtually no money – there was about $30,000 in my 401(K) retirement amount at Tellabs and $70,000 available in credit card limits, on a number of credit cards that I signed up for in anticipation of starting my business.

I researched U.S. Bankruptcy laws and I found that they were not too onerous. if the business went south and I was unable to cover my debts, I could declare personal bankruptcy and start over.

It was a very similar situation to Papa Patel- there wasn’t much downside because there wasn’t much to lose. also, when I resigned, my boss told me that they’d have to have me back any time, and they were likely to give me a decent raise as well. (TransTech company Dhandho by Mohnish Pabrai)

All I had to lose was the $30,000 in my 401(K) retirement account. I was all of 25 years old; the last thing I was concerned about was depleting my retirement assets.”

then author explains how they start the company

the author says, ” I incorporated Transtech in February 1990, while continuing to work at Tellabs. I took 1/2 day off as vacation time, whenever I had client sales calls. I used to work on the business at home in the morning from 6:30 AM to 8:30 AM,

Be at work during the day and again work on the business in the evening from 6:00 PM to midnight. I had a paycheck coming in and every little in the way of business expenses.

When I had the first client and revenues over $200,000 a year in the bag, I resigned. If you look at the approach. the only downside I had was the Possible loss of my paltry $30,000 in 401(K) assets.

The upside was enormous easily several million dollars. Visa and Master Card were my venture capitalists funding the rest of it. I was single at the time. (TransTech company)

There was no family to worry about. Many lunches and dinners back then were comprised of a simple subway sandwich. my expenses were pretty low.

I considered staying at Tellabs to be a risky proposition. I thought that if I just stayed at the company, it was likely to be a boring and slow corporate path.”

then the author explains, why starting at age 25 is good than 35 or 45? and what is his game plan.

the author says, ” 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. (TransTech company Dhandho by Mohnish Pabrai)

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 shortages of talent in the mid-western 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”

then the author explains, how the company grows and how much return gets on his investment.

the author says, ” TransTech scaled nicely. In 1996, we were recognized as an Inc. 500 company- one of the 500 fastest-growing businesses in the united states.

As revenues went from nothing to over $20 million annually in 10 years, the business never took a dime off outside capital.

Cash Flows provided all the growth capital and then some. cash was always very tight as we were growing very rapidly and reinvesting all available capital to scale.

In late 1991 I found a terrific banker, Tom Harazim, who liked our story. He paid off all my credit cards, got us off the very expensive factoring of receivables I was doing to bring in cash as quickly as possible, and got TransTech set up with a hugely cheaper line of credit based on our pristine receivables.

We did a sale of some assets for about $2 million in 1994, which made me feel rich for the first time. And then the entire business was sold in 2000 for several million dollars. (TransTech company Dhandho by Mohnish Pabrai)

A $30,000 investment got me more than 150 times return over 10 years- an annualized return of well over 65%. I went from a salary of $45,000 a year(when I quit my job) to consistently having a salary of over $300,000 a year in a few years.

The magic word is Dhandho, baby- Huge upside with virtually no downside. it was a classic.

” Head, I win; Tails, I don’t lose much”   …. kind of bet.”

so, friends, the author start their first business, before starting Pabrai Funds.

from the above story, We should have to learn, to become very wealthy.

  • Take a Job to generate income for our monthly expense
  • Start a business, part-time. (TransTech company Dhandho by Mohnish Pabrai)
  • Take a calculated risk for business, like the author takes their retirement money to start a business
  • Work very hard(100 + hours a week), and live a Dual life, up until you don’t need a job for your regular monthly expenses
  • Start early, because, you don’t have much responsibility like family expenses, students’ education, etc. don’t worry if you have family expenses, then take a calculated risk.
  • Full focus on business, and in the job, do work as like above your firing level:- not more or not less to fire

for more understanding of this concept, see the following video of Mohnish Pabrai on Secrets of creating massive wealth

Steel Companies: Mittal Dhandho

Hello friends, in today’s article, we see the Steel Companies of Laxshmi Mittal Dhandho. This story is shared in the book the Dhandho Investor by author Mohnish Prabrai ( Prabrai Fund Manager/ World Famous Value Investor/ Shameless Cloner). so let’s understand maximum capital-intensive business in Dhandho Framework.

Previous Article:- Virgin Groups Case Study

Mittal Dhandho:-Steel Companies

Steel Companies: Mohnish Prabrai on Mittal Dhandho

In starting this chapter, the author Mohnish Prabrai gives the background of Lakshmi Mittal.

the author says, ” Bordering Pakistan is Rajasthan, the most colorful state of India, And Marwar is a small district within the state. The Marvaries is regarded by many as being the very best practitioners of the art of Dhandho. Their amazing Dhandho endeavors, in many cases, leave the Patels in the dust.

in the 2005 Forbes ranking of the wealthiest humans on the planet, Bill Gates and Warren Buffett took the usual top two spots. But nipping at their heels at number three is a Marvaris entrepreneur, Laxshmi Mittal.

Mittal, from a standing start, with virtually nothing 30 years ago, has a net worth of over $20 billion today.

He began his Dhandho journey at about the same time as Bill gates, As we knew Bill invested his energies in an industry that offers the highest returns on invested capital. (Steel Companies: Mohnish Prabrai on Mittal Dhandho)

He got a few engineers together, created MS-DOS and Microsoft word, then sold hundreds of millions of copies. Let’s investigate the amazing economics at work. A single copy of Microsoft Office is sent to Dell to load onto Dell PCs.

Each time Dell loads Office on any machine, it sends Redmond, Washington, a few hundred dollars. there are hundreds of millions of copies made all over the planet-yielding billions upon billions every year for Microsoft. the return on invested capital is out of sight and the gross margin approaches 100%. ”

then the author explains the opposite business of Bill Gates’s Software company Microsoft. the business of steel companies started by Laxshmi Mittal

the author says, ” 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.- i.e. Steel Mills.

Unlike Microsoft, In a steel Mill, you have no control over the Selling price of the finished product and you have no control over the cost of raw materials.

Steel Mills are very Capital-Intensive Creatures, if that wasn’t a toxic-enough cocktail already the workforce is usually unionized. (Steel Companies: Mohnish Prabrai on Mittal Dhandho)

The steel industry has been one of the worst places to invest capital in the past 30 years. It is no wonder that all over the globe the players in space have encountered tremendous pain and a large number have ended up bankrupt.

Mittal Started in 1976 with a single, small nondescript steel mill in Indonesia. Despite having all the odds stacked against him, he ended up creating one of the largest and most profitable steel businesses on the planet.

More important ( for him) he ended up with a net worth of over $20 billion and growing. ”

then the author explains how he does it.  they started the Steel Mill Companies.

the author says, ” How does he do it? there is a simple one-word Explanation -Dhandho.

Take the example of the deal he created to take over the gigantic Karmet steelworks in Kazakhstan.

The company had stopped paying its workforce because it was bleeding red ink and had no cash. The plant was on the verge of closure with its Soviet-era managers forced to barter steel for food for its workers.

The Kazakh Government was glad to hand Mr. Mittal the keys to the plant for nothing. Not only did Mr. Mittal retain the entire workforce and run the planet, but he also paid all the outstanding wages and within five years had turned it into a thriving business that was gushing cash.

The workers and townfolk literally worship Mittal as the person who saved their town from collapse. The same story was repeated with the Sidek-Steel Plant in Romania, and the Mexican government handed him the keys to the Sibalsa Mill for $220 million in 1992.

It had cost the Mexicans over $2 Billion to build the Plant. Getting Dollar bills at 10 cents – or less – is Dhandho-on Steroids. (Steel Companies: Mohnish Prabrai on Mittal Dhandho)

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

then the author explains, how Mittal got 3rd in Forbes magazine, across the world-famous Tech Companies Operators.

the author says, ” The people who founded Google, Oracle, Cisco, and Intel were all very talented, but they also had huge tailwinds propelling their net worth. Into the stratosphere.

They all focused on business with amazing economics and very high returns on invested capital. Amazingly, it is Mittal, facing massive headwinds, who has a higher net worth than all of them.

the Dhandho Framework helped him triumph over all but two members of the forces -400. and as we learn before we’re done, both the guys ahead of him are true connoisseurs and practitioners of the fine art of Dhandho.

Whether you hail from Seattle, Omaha, or Marwar, the Dhanho Framework to business pretty much trounces all others.”

then lastly author gives the final note on Marwaries Dhandho Framework (ways)

the author says, ” A final note on the Marwaris and their ingrained Dhandho ways.

Recently, I had dinner with a good Marwaries Friend of mine, and I asked him how the stereotypical Marwari approaches investing capital in a venture.

He said, quite nonchalantly, that Marwari business people, 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. (Steel Companies: Mohnish Prabrai on Mittal Dhandho)

They expect these to be ultra-low-risk bets. Now, folks, this is really good stuff- they don’t teach this at the Harvard Business School.

if you simply used this Marwari Formula before making any investments, let me assure you two things.

  • You’d take a quick pass on most investments offered to you: and
  • Starting with very little capital, after a few decades you’ll be very wealthy.

Enough said.”

so this is all about the Mittal Dhandho Framework on Steel Companies of Lakshmi Mittal from the book the Dhandho Investor written by Mohnish Prabrai.

Investing In Cryptocurrency Basic

Hello friends, in today’s article, we see the Investing in Cryptocurrency basic. Before investing in cryptocurrency, we should know how it works. Peoples say cryptocurrency is a secure currency no one hack it, tract it. so let’s see Cryptocurrency’s basic idea.

Warren Buffett Rules on Investing 

Cryptocurrency Basic:-

Investing In Cryptocurrency Basic

Cryptocurrency all depends on the most secure Technology it’s called Blockchain technology.

If you want to understand Blockchain Technology and Cryptocurrency, before that we should know about the Cryptography technique.

In this article, we are talking about Cryptography, and how it’s used in Blockchain technology.

so let’s start.

Cryptography:-Investing In Cryptocurrency Basic

Cryptography means, the hidden writing or message.

if you want to send a private message, then you have to write in code words. Because another third person can’t understand your private message. Only those person know, one who send the message and one who receives the message. just like, some of the army missions hidden confidential messages.

Cryptography is widely used in world war II, German send messages in cryptography to their senior officer, because British or American soldiers don’t understand them. (Investing In Cryptocurrency Basic)

now let’s understand the new computer century cryptography language i.e. Blockchain Technolgy.

Blockchain Technology:-

To understand blockchain technology, we should know the three basic concepts.

1) Encryption/Decryption:-

Encryption means, the original message is converted into ciphertext with the help of a computer is known as Encryption.

Decryption means the ciphertext is converted to the original message is called Decryption.

For this Encryption and decryption, we need the keys. let’s understand the key concept in blockchain technology.

let’s understand the keys concept with the help of examples

Example:- The Original message is HELLO, let’s say, it is an encrypted key, which means One Letter next to the Original message (HELLO), so for the HELLO message, we use IFMMP. ( H=I, E= F, L=M, O=P)

so we are taking the next letter of words like secret, so I send IFMMP.

so this message is don’t understand by a third person. I know, I send Hello, and that person receives, they also knew about the key ( next letter of the word), then they can decrypt the message. (Investing In Cryptocurrency Basic)

so those people receive the message, they know the key then they decrypt IFMMP into HELLO words.

The process of encryption and decryption are two types, symmetric and Asymmetric

Symmetric:-

In Symmetric, we use the same key for encryption and decryption. The above example of hello comes in Symmetric cryptography.

the problem with symmetric cryptography is most know the key to decrypt the message by Receiver. so you have to tell them the key on the phone or meeting personally.

And in this time, other third-person, can listen to your key and understand your private message by using the key.

To solve this problem, we use Asymmetric cryptography.

Asymmetric:-

In Asymmetric, we use the different keys for encryption and decryption, but they are mathematically linked. just like our Nikes shoes. (Investing In Cryptocurrency Basic)

In this key pair, one key is used for encryption and another key is used for decryption. so these two keys have their own name

Public Key:- this key, you can share with anyone (public).

Private Key:- this key, you can not share with people, you keep yourself as a password.

By using your public key people encrypt the message and send you. and you know the how-to decrypt message, with your private key.

People can send you a public key without any hesitation, and you can send a message by using their public key, and they see the message by decryption with their private key.

In Blockchain technology, Asymmetric cryptography is widely used. this Asymmetric is used in two places.

In the first place: for your account, number/username/address

those are your public key is your account number.

In second place:- If you want to send Bitcoin or any cryptocurrency, you have to authorize that transaction by using your private key. (Investing In Cryptocurrency Basic)

The public key is your account number

The private key is your password.

So anyone can send you digital money ( cryptocurrency), but from your account, no one takes money until your private key is available to another person.

let’s see the second concept of cryptocurrency.

Hash function:-

to understand the Hash function, let’s take the math function.

A hash function is like, in math we see Addition, subtract, multiply, divide function, just like that is the Hash Function.

example:- Add function:- 3 + 2 is an input, and the result 5 is output.

just like, Subtract function:- the input 3 – 2, then output is 1.

some as the add and subtract function.

A hash function is also working, like that, by following some mathematical function.

By providing Input, give the output.

Hash Function has two types.

  1. Basic Hash Function
  2. Cryptographic Hash Function.

In blockchain technology, we use the cryptographic hash function. so let’s understand the cryptographic hash function.

Cryptographic Hash Functions, are those in that you can give any input, but their output is always Unique like a fingerprint. (Investing In Cryptocurrency Basic)

Now let’s see the characteristic of the cryptographic hash function.

Characteristics of Cryptographic Hash function:-

  • Identical output for identical input:- By giving any input, the output is always the same for example, let’s say the input is HELLO, and output is ABC. Means someone says hello, their always output is ABC. So ABC is unique output, that only comes for Hello Input.
  • Hard to find two inputs with the same output
  • Output is unpredictable even when input changed slightly.
  • by providing output for any kind of Input.
  • You can’t compare input from the output:- one-way function, means, if you know, the output is V35, so you can’t guess the input.

Hash Function, give those output, so that output, called as Hash Value Fingerprint or digest.

now, let’s see the uses of hash Function in Blockchain technology.

Uses of Hash Function:-

  1. the hash function is used to compare two data without checking content piece by piece:- Two things are the same without knowing what it is if two documents have every 10 pates so we don’t need to read line by line in the hash function. I just take the hash of both documents, if with documents has hash value sone, means their inputs are same ( nothing more difference, if they have the difference, then hash value also be different.)
  2. The hash function is used to determine, whether data was changed by someone:- if some disrupt the data, if someone disrupts, then new data hash value is different from the first one. (Investing In Cryptocurrency Basic)

now let’s see how this hash function where used in blockchain technology.

so blockchain technology is a type of register, in them, all transaction is recorded. so it is necessary to know if someone disrupts the data. so for this hash function is very important.

  1.  To store transaction data in a change sensitive manner
  2. to incur computational costs for adding/changing data:- if for hacker/thief want to change the date, it may be hard or expensive for the hash function used. In the blockchain, any new data adding or changing Old data, we have to ( solve the Hash puzzle.) so to solve that puzzle is very expensive.
  3. use as a fingerprint or transaction data:- Hash function used in blockchain to found out hash Value of Transaction data to a minimum and manageable, because, whatever size of input hash function gives output is fixed length, and that is manageable as compared to input data that may be big.

now let’s see the third important concept of cryptocurrency.

3) Digital Signature:-

The digital signature is made by using our private key when you transfer cryptocurrency from your account to another’s account.

signature are two types, one is a handwritten signature, that written by hand.

but for online work, we create Electronic signatures.

There are three types of Electronic Signatures.

  1. That signature we write on paper and upload on the computer ( this must be used in filling exam form, any scheme form)
  2. Write down the full name, they are like declaration signs, in that we write our full name.
  3. Electronic Signature is a Digital signature

so in blockchain technology, the forms are in ciphertext, so by seeing them, we can not understand.

now, let’s see, What is a digital signature, and why this is required in blockchain technology. (Investing In Cryptocurrency Basic)

Except for digital signature, other signatures have two problems, that’ why we need a digital signature.

  1. Documents can tamper after signature:- The first problem is, after signing you, your documents can be used for wrong purposes. e.g. If you sign the check and somebody edits that sign, or add one more zero on the check, or number change, these things may be happening.
  2. The signature can be copied to other documents.

so digital signature solves this problem.

A digital signature is only used for those specific documents and not for other documents.

let’s understand how it’s work

For example, Suppose, you want to send content or any documents, so you have to sign digitally. so first you pass this message in the hash function, then the hash value generates. so this hash value, you encrypt with the private key, then ciphertext come.

So this ciphertext is your digital signature.

you encrypt the message with the help of a private key and hash function which are your digital skill. so now, you can share this message in the open air, and your ciphertext ( digital signature) is also sent in the open air.

so now, let’s see how people, verify that is your message and signature.

First, they take your message and pass through the hash function then come hash value.

Second, they take your digital signature, they put the public key, then come to the original things (first)

so what is original things is the hash value of that message.

the digital signature hash value comes by using the public key and message hash value, if both are the same, then verify the signature. (Investing In Cryptocurrency Basic)

Digital signature told the sign of this thing is written by the account holder.

How they know,

the digital signature, they are in ciphertext if they come some by using a public key to passible decrypt. This means public keys corresponding private key, have account holder so that only person make the digital signature.

so the question comes, how do they verify this,

you take the Hash value of, the original message those comes in the air, then you decrypt the digital signature by using a public key, then the hash value comes.

so both are matching, so this is the original message by a private key, which means the account holder wrote this sign. means they authorize this document.

By using a hash function and private key, we can find out that, naturally owner is signed, and the other is is the content the owner signed.

so in blockchain technology, the digital signature is used in two places.

a) Transaction sign:- means if you want to transfer cryptocurrency from your account to another account, for that you use digital sign. (Investing In Cryptocurrency Basic)

b) Transaction Verification:- the minor(computer guys) verify your transaction. they take as like, see the hash value of the original message and digital signature hash value, both are same then verify your transaction.

so these are the basics of blockchain technology used in cryptocurrency.

In the next article, we see the different types of cryptocurrencies.

Hello friends, if you want to invest in cryptocurrency, you should must know above concept.