In 2007, Mohnish Pabrai — a self-made value investor who turned $1 million into $1 billion in assets under management — published The Dhandho Investor and distilled the core idea into six words: "Heads I win, tails I don't lose much."
"Dhandho" (દાંધો) is a Gujarati word meaning "endeavors that create wealth." The Patel community — immigrant motel owners in the US — exemplified it: buy distressed motels cheaply, renovate on a shoestring, earn high returns on capital. If the motel fails, they lose little. If it succeeds, they get rich. The same logic applies to stocks.
The Classic Dhandho Setup
A Dhandho investment has three components: a low current price, a hard floor limiting downside, and significant upside if things go right. Here is the textbook example:
The Dhandho Setup
Stock price = $10.00
Liquidation / floor value = $8.00 (assets, cash, breakup value)
Upside target (turnaround works) = $25.00
Downside risk = ($10 → $8) = -20%
Upside potential = ($10 → $25) = +150%
Reward-to-risk ratio = 150% ÷ 20% = 7.5 : 1
The key insight: the downside is capped and small, while the upside is large and open-ended. Even if you are wrong half the time, the wins overwhelm the losses. This is asymmetric payoff — the foundation of Dhandho investing.
Asymmetric Payoff: Visualized
The bar chart below shows the return profile of our Dhandho setup across four scenarios. Notice how the red bar (worst case) is small compared to the green bars (positive outcomes). This asymmetry is what makes the bet rational even with significant uncertainty.
Expected Value: The Math Behind the Magic
Expected value (EV) is the most important concept in probabilistic thinking. It answers the question: "If I made this bet 1,000 times, what would be my average result?"
Expected Value Formula
EV = (Pwin × Upside) + (Ploss × Downside)
Where Pwin + Ploss = 1. The expected value tells you the average outcome per bet if you repeated it many times.
Applying to Our Example (50% probability of success)
EV = (0.50 × +150%) + (0.50 × -20%)
EV = +75% + (-10%)
EV = +65% expected gain
Even with a coin-flip probability, the asymmetry creates a huge positive expected value. That is Dhandho.
A +65% expected value from a coin flip. That should feel counterintuitive — and it is what makes Dhandho so powerful. You do not need to be right most of the time. You just need the payoff to be skewed in your favor.
Why Asymmetry Matters More Than Accuracy
Most investors obsess over being right. Dhandho investors obsess over being asymmetric. Here is why:
Investor A — High Accuracy
Win rate: 80%
Average win: +10%
Average loss: -40%
EV = (0.8 × 10%) + (0.2 × -40%)
EV = 0% (break even)
Investor B — High Asymmetry (Dhandho)
Win rate: 40%
Average win: +100%
Average loss: -20%
EV = (0.4 × 100%) + (0.6 × -20%)
EV = +28% per bet
Investor A is right 80% of the time and barely breaks even. Investor B is wrong 60% of the time and generates 28% expected return. The size of your wins relative to your losses matters far more than how often you win.
Where to Find Dhandho Setups
Asymmetric opportunities do not appear in popular, well-covered stocks trading at all-time highs. They appear in places most investors are too scared or too lazy to look:
Distressed businesses with hard assets
Companies in temporary trouble whose stock has crashed, but whose underlying assets (real estate, cash, patents) provide a floor.
Spin-offs and special situations
Corporate restructurings that create forced selling — index funds must sell, creating artificially low prices.
Fallen former stars
Once-great companies that stumbled. If the brand, infrastructure, or customer base is intact, the turnaround can be explosive.
Net-net and deep value
Ben Graham's original strategy: buy stocks trading below their net current asset value (NCAV). The entire business is free.
Example Setups: The Numbers
Here are three hypothetical Dhandho setups showing different risk/reward profiles. Notice how each one has a defined floor, a clear upside, and a favorable reward-to-risk ratio:
| Setup | Price | Floor | Target | Downside | Upside | Ratio | EV @50% |
|---|---|---|---|---|---|---|---|
| Distressed Retailer | $4.00 | $3.50 (real estate value) | $12.00 (if turnaround) | -12.5% | +200% | 16 : 1 | +93.8% |
| Fallen Tech Stock | $15.00 | $10.00 (cash on balance sheet) | $40.00 (recovers to old multiple) | -33% | +167% | 5 : 1 | +67% |
| Spin-off Company | $20.00 | $17.00 (sum-of-parts) | $35.00 (market re-rates) | -15% | +75% | 5 : 1 | +30% |
Interactive Expected Value Calculator
Enter any stock setup below: the current price, your estimated floor value, your upside target, and the probability of success. The calculator will compute the expected value, reward-to-risk ratio, Kelly Criterion sizing, and show how the EV changes across different probability estimates.
Payoff Profile
-20.0%
-$2.00/share
Expected Value
+65.0%
+150.0%
+$15.00/share
Expected Value
+65.0%
Reward : Risk
7.5 : 1
Max Downside
-20.0%
Kelly Criterion
43.3%
Expected Value at Different Success Probabilities
With this payoff structure, even a very low probability of success yields a positive expected value. That is the power of asymmetry.
Common Mistakes to Avoid
- Confusing cheap with Dhandho — A stock down 90% is not automatically asymmetric. You need a hard floor (assets, cash) that limits further downside. Without a floor, the "cheap" stock can go to zero.
- Overestimating the upside — Be conservative on your target. If you need a 10x return for the bet to work, it is not Dhandho. The whole point is that even modest upsides generate positive EV because the downside is so limited.
- Ignoring the floor — The floor is the most important number in the equation. Spend 80% of your research time verifying the floor and 20% on the upside.
- Sizing too large — Even positive-EV bets can blow up your portfolio if sized too aggressively. The Kelly Criterion provides a maximum, but in practice, use half-Kelly or less.
- Ignoring time — A Dhandho setup that takes 10 years to play out may have a great EV but poor annualized returns. Factor in how long the thesis needs to work.
The Bottom Line
Dhandho investing is not about being smarter than the market. It is about structuring your bets so that the math works in your favor even when you are wrong. Find situations where the downside is small and defined, the upside is large and plausible, and the expected value is positive.
Heads I win big. Tails I lose a little. Repeat. That is how wealth is built — one asymmetric bet at a time.