Week 2 - Assignment

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University Of Arizona *

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608

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Business

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May 30, 2024

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Uploaded by MegaDragon6282

Dhandho Approach to Business Alina Zargaryan The University of Arizona Global Campus BUS 608: Great CEOs and Investors - Leadership, Strategy, and Generating Return Dr. Tanya Scott April 22, 2024

Introduction When investing, whether in a company or an individual, there is always a risk of losing the amount invested. The Dhandho investment framework, developed by Mohnish Pabrai, presents a strategic approach that embodies the core ideas of value investing, which aim to reduce risk while maximizing possible profits (Pabrai, 2007). At the center of this theory is the belief that investing cautiously in straightforward, frequently struggling enterprises with predictable and slow-changing conditions can achieve potentially profitable outcomes while minimizing the risk of significant losses. Pabrai's strategy promotes the acquisition of firms at huge discounts compared to their true worth, reducing potential losses if the investment fails and positioning for significant rewards if the ventures are successful. This paper will analyze Apple's real-life business examples and describe the low-risk, high-return approach to business, justifying the validity by explaining the reasoning. The Dhandho Approach The Dhandho framework encompasses various components of the two quotes. It is a strategy for investing that combines a cautious and calculated approach with the possibility of achieving significant profits while minimizing risk. The underlying principle of value investing is encapsulated in the attitude of "heads, I win; tails, I do not lose much" (Pabrai, 2007). This theory promotes investing in established, uncomplicated, and frequently troubled enterprises that see gradual changes over time. Pabrai's investment strategy involves acquiring businesses at substantial discounts to their intrinsic value (Pabrai, 2007). This approach ensures that the initial low purchase price mitigates potential losses even if the investment underperforms. Since many of the processes in his framework center on making decisions and attempting to maximize their potential, this example is one of the nine steps. “The lower the price paid relative to the probable

intrinsic value of the business, the higher the potential returns if the assessment is correct and the lower the potential losses if the assessment is incorrect (Pabrai, 2007). This approach is specifically designed to take advantage of market inefficiencies by carefully selecting investments based on their past performance and fundamental stability. This allows investors to make significant investments when the odds are highly favorable, resulting in maximum profits while controlling risks. Apple, led by CEO Tim Cook since 2011, has thrived with innovation and practicality. Apple CEO Tim Cook has strategically shifted the company's focus towards expanding its ecosystem, emphasizing services and wearable technologies in addition to its flagship products, such as iPhones and Macs. Apple's diversification has played a crucial role in its efforts to decrease reliance on iPhone sales, which have historically been the primary source of revenue (Larsen, 2023). For example, the introduction of Apple Music, Apple Pay, and the Apple Watch has expanded its market and revenue streams, leading to a more sustainable business model that capitalizes on solid customer loyalty and seamless integration across Apple devices. Tim Cook prioritizes sustainability and social responsibility in his strategy for long-term value creation (Dudovskiy, 2023). He ensures that Apple's operations align with societal values, which are increasingly influential in consumer decisions. With his guidance, Apple has made significant commitments to privacy, renewable energy, and supplier responsibility. These commitments not only enhance its brand reputation but also strengthen its operational framework at a time when corporate responsibility directly impacts customer trust and company valuation. In addition, Apple's financial strategies under Cook's leadership prioritize robust capital return programs. Apple is renowned for its proactive approach to share buyback programs and its commitment to providing consistent dividends (Carnette, 2016). This strategic approach has

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recently returned over $100 billion to shareholders (Carnette, 2016). This substantial capital allocation practice helps maximize shareholder value while ensuring sufficient liquidity for investments in research and development and strategic acquisitions. As a result, it strengthens the company's competitive position in a dynamic technology industry. Cook has fostered a culture that prioritizes creativity, collaboration, and inclusion, which fosters innovation in human resource decisions. Apple's expansion into various industries is evident through its strategic recruitment of top-level executives from the automotive and health sectors (CB Insights, 2019). Apple's careful financial management allows it to navigate economic downturns, invest in new technology, and enter new markets while maintaining its financial stability. These strategic human and financial moves boost Apple's market position and ensure its technological and market dominance. Core Belief of Dhandho Value investing with the Dhandho technique emphasizes low risk and large profits, which is appealing and beneficial for appraising enterprises during economic downturns. As stated by Mohnish Pabrai (2007), one of the basic principles of value investing is the Dhandho strategy's primary belief in minimizing risk while maximizing possible rewards. The core of this belief revolves around investing in businesses that are easy to comprehend, experience gradual changes, and can be purchased at a substantial discount compared to their true worth (Pabrai, 2007). This approach ensures that the potential reward exceeds the associated risk. Pabrai provides ample evidence in his book, showcasing the track record of low-cost, straightforward, and distressed investment opportunities that have consistently yielded impressive returns (Pabrai, 2007). He notably references the success of Patel motel owners who purchased motels at low prices during economic downturns and managed them efficiently, reaping substantial profits.

The Dhandho Investor by Pabrai provides a wealth of case studies that support his investment philosophy. One such example is the story of motel owners who capitalized on economic downturns by acquiring properties at discounted prices and effectively managing them, resulting in impressive returns (Pabrai, 2007). The Dhandho approach is exemplified by this strategy of purchasing undervalued assets with a margin of safety and minimal downside risk. Applying this framework to Apple initially seems less applicable since Apple is a premium- priced company in a rapidly evolving industry. Apple's consistent ability to maintain a competitive advantage through innovation, a loyal customer base, and a comprehensive ecosystem aligns perfectly with Dhandho's investment strategy of focusing on businesses with a durable competitive advantage (Dudovskiy, 2023). Apple's expansion into services and wearables opens up exciting opportunities for growth with favorable risk levels. Although Apple may not align with the distressed or undervalued criteria typically favored in Dhandho investing, its strategic management and strong market position exemplify the principle of maximizing returns while managing risks. Conclusion Apple's corporate stature and market dynamics may differ from traditional distressed assets, but under Tim Cook's leadership, its strategic management reflects core principles adapted for a high-tech economy. The company's strategy of expanding its ecosystem, upholding corporate responsibility, and strategically allocating capital aligns with Pabrai's philosophy of seeking investments that balance risk and reward. Apple's strategies showcase the broader applicability of the Dhandho framework, proving that even premium-valued companies in dynamic sectors can embody value investing through innovative and prudent management practices.

References Carnette, J. (2016, January 5). Apple's share-buyback program cannot replace top-line growth . Fox Business. CB Insights. (2019, January 8). Apple Healthcare: Health Plan & Strategy L CB insights . Research Briefs. Dudovskiy, J. (2023, July 11). Apple Corporate Social Responsibility (CSR) - research- methodology. Research. Pabrai, M. (2007). The Dhandho investor: The low-risk value method to high returns . Wiley Larsen, R. (2023, December 5). The Business and Revenue Model of Apple Explained . Untaylored.

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Week 2 - Assignment

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