Heads, I win. Tails, I don’t lose much

You might not have heard of Mohnish Pabrai, but he’s one of the modern greats in investing.

“Heads I win. Tails I don’t lose much” is an approach that’s made him very rich. The basic idea is that before you invest, you should consider the downside, and only invest in that idea if you have a high conviction of success and you don’t expect the downside to be too bad, if you’re wrong.

Yes, there’s a sense of having your cake and eating it too, but for a risk-averse investor the idea itself is a useful framework.

Think about Harvey Norman Holdings Limited (ASX:HVN) a couple of years ago. The share price was less than the value of all of the property on the company’s books. Sure, that number could prove too high, but it was a reasonable backstop for your valuation.

Or Fairfax Media Limited (ASX:FXJ), now the subject of a takeover offer. Its Domain business is conservatively valued at around $2 billion. So, pre-takeover, there was a decent reason to believe the company was worth at least that.

But don’t be mistaken. Harvey Norman’s shares could well have fallen further, as the market remained irrational. Fairfax could have chewed up all of Domain’s value as it supported a loss-making media business for decades.

So nothing is perfect or failsafe. But ‘Heads I win, tails I don’t lose much’ is an interesting approach if you don’t like taking too much risk. Speaking of which, another way to moderate your portfolio risk is through dividends. You get paid, management has less opportunity to waste the money, and it’s real cash in the bank, twice a year!

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This company's dividend is almost the stuff of legends. Since it started paying dividends in 2007, it has increased its payout to shareholders every single year, a run that includes 21 consecutive dividend increases.

Based on the last 12-months of dividends, its shares are currently offering a fully-franked 4.8% yield, which grosses up to almost 7% when those franking credits are included. And in stark contrast to the likes of Commonwealth Bank and Telstra, this company just increased its dividend by over 13%, and guided for 2017 profits to grow by 20%!

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Motley Fool contributor Scott Phillips (TMFGilla) has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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