Dhandho 403: Invest in the Copycats Rather than the Innovators
Innovation is often celebrated as the ultimate driver of business success. Entrepreneurs who introduce revolutionary products, disrupt established industries, and create entirely new markets are frequently portrayed as the greatest wealth creators. Investors, influenced by these stories, naturally begin searching for "the next big thing"—the next groundbreaking technology, the next revolutionary startup, or the next company that promises to change the world.
Mohnish Pabrai takes a remarkably different view.
In this chapter, he argues that while innovation certainly has value, investing in innovators is often far riskier than investing in companies that successfully copy, improve, and scale proven ideas. According to the Dhandho philosophy, the objective is not to be first. The objective is to achieve superior returns with the least possible risk.
This distinction lies at the heart of the chapter.
Innovation involves uncertainty.
Copying proven success dramatically reduces it.
The first company introducing a new product must answer countless unanswered questions. Will customers actually want it? Can it be manufactured economically? Will competitors quickly imitate it? Can management execute the business model successfully? These uncertainties make forecasting extremely difficult.
By contrast, companies that enter after customer demand has already been established operate under far more favourable conditions.
They no longer need to prove that a market exists.
They simply need to execute better than others.
Pabrai believes this second path often offers a much more attractive investment opportunity.
One of the most powerful examples discussed in the chapter is McDonald's.
Many people assume that Ray Kroc invented the modern fast-food restaurant.
In reality, he did not.
The original McDonald's restaurant was created by the McDonald brothers.
Ray Kroc recognized the brilliance of their operating system and saw an opportunity that others had overlooked.
Instead of inventing an entirely new business model, he focused on expanding an existing one.
More importantly, McDonald's did not become the world's largest restaurant chain because every successful idea originated from its corporate headquarters.
Many menu improvements, operational innovations, and efficiency enhancements actually came from franchise owners who experimented with their own ideas.
Whenever a franchisee developed a process that worked exceptionally well, McDonald's adopted and standardized it across the entire system.
This created a powerful cycle of continuous improvement.
Rather than depending upon one person's creativity, the company benefited from thousands of entrepreneurs collectively discovering better ways of operating.
Its greatest strength was not invention.
Its greatest strength was identifying successful ideas and scaling them globally.
Pabrai argues that this ability to scale proven concepts represents one of the most valuable competitive advantages a business can possess.
The chapter then examines another company that many people associate with innovation—Microsoft.
Despite its reputation as one of the world's leading technology companies, Pabrai points out that Microsoft achieved many of its greatest successes not by inventing entirely new products but by refining and commercializing ideas that had already demonstrated market acceptance.
The graphical user interface had earlier influences.
Spreadsheet software existed before Excel.
Word-processing programs existed before Microsoft Word.
Internet browsers appeared before Internet Explorer.
Gaming consoles existed before Xbox.
In each case, Microsoft observed products that customers had already embraced.
Rather than taking the enormous risks associated with creating completely new markets, the company entered markets that had already proven their commercial viability.
It then used its resources, distribution network, engineering capabilities, and execution skills to improve existing products and expand their reach.
This strategy significantly reduced uncertainty.
Instead of wondering whether customers wanted a particular type of software, Microsoft already knew demand existed.
Its challenge was execution rather than invention.
This perfectly aligns with the Dhandho philosophy.
Risk decreases dramatically when customer demand has already been validated.
The chapter also reveals that Pabrai applies the same thinking to his own investment business.
He openly acknowledges that Pabrai Investment Funds was largely inspired by Warren Buffett's original investment partnerships.
Rather than attempting to create an entirely original investment structure, Pabrai carefully studied Buffett's approach.
He adopted similar principles regarding fee structures, investment philosophy, reporting methods, partnership design, and long-term capital allocation.
This admission illustrates an important lesson.
Copying successful ideas should never be viewed as a weakness.
When executed intelligently, it represents one of the most rational approaches to business.
Learning from those who have already solved difficult problems eliminates unnecessary experimentation and dramatically increases the probability of success.
Throughout history, many of the world's most successful businesses have followed this pattern.
Very few companies invent entirely new industries.
Most achieve greatness by improving existing products, refining business models, reducing costs, expanding distribution, or delivering better customer experiences.
The original innovator assumes enormous uncertainty.
The successful copycat often captures an even larger share of the resulting market.
Pabrai therefore encourages investors to distinguish between innovation and execution.
Innovation attracts headlines.
Execution creates lasting wealth.
Many brilliant inventions fail because management cannot scale production, control costs, build distribution networks, or generate sustainable profits.
Conversely, businesses that execute exceptionally well frequently outperform more innovative competitors.
Investors often become fascinated by originality while overlooking operational excellence.
The Dhandho investor deliberately avoids this mistake.
Another important lesson concerns predictability.
Businesses built upon proven concepts are generally easier to analyze than businesses introducing entirely new technologies or products.
Historical performance provides valuable information.
Customer behaviour becomes easier to forecast.
Competitive dynamics are better understood.
As uncertainty decreases, estimating intrinsic value becomes more reliable.
Reliable valuation lies at the core of value investing.
Without predictable economics, determining whether a stock is undervalued becomes extremely difficult.
This explains why Pabrai prefers copycats.
Their futures tend to be easier to estimate because markets have already demonstrated demand for their products or services.
The chapter also highlights an important psychological bias.
Investors naturally admire originality.
Stories about visionary founders creating revolutionary products inspire excitement.
Financial media frequently celebrates disruptive technologies and breakthrough innovations.
As a result, many investors mistakenly assume that extraordinary investment returns require discovering companies before everyone else.
Pabrai disagrees.
The Dhandho philosophy seeks superior returns through superior probabilities, not superior excitement.
A company that quietly improves existing ideas while generating consistent profits often becomes a far better investment than an innovative business struggling to prove its commercial viability.
This principle does not suggest that innovation lacks importance.
Without innovators, there would be nothing to improve or expand.
Innovation drives progress.
However, innovation also carries enormous uncertainty.
Many revolutionary ideas fail despite their technical brilliance.
Consumer preferences may differ from expectations.
Costs may exceed projections.
Competitors may respond aggressively.
Markets may evolve differently than anticipated.
Copycats avoid many of these uncertainties because they operate after the market has already validated the original concept.
Timing therefore becomes a strategic advantage rather than a disadvantage.
The chapter also reminds readers that investing differs fundamentally from entrepreneurship.
Entrepreneurs may willingly embrace innovation because they seek to create entirely new businesses.
Investors, however, seek favourable risk-adjusted returns.
Their objective is not to reward originality.
Their objective is to allocate capital intelligently.
If proven business models offer better probabilities than speculative innovations, the rational investor should choose the proven path.
Ultimately, this chapter reinforces one of the central messages running throughout The Dhandho Investor: the safest path to exceptional returns often involves following successful models rather than attempting to reinvent them. Businesses that copy, refine, and scale proven ideas typically face fewer uncertainties, require fewer assumptions, and generate more predictable economic outcomes than businesses attempting to create entirely new markets.
The Dhandho investor therefore values execution above invention. Rather than chasing the newest innovation, they patiently search for companies led by managers who consistently demonstrate an ability to improve proven business models and expand them successfully. In the long run, disciplined execution has repeatedly created more enduring wealth than bold experimentation.
By investing in skilled copycats instead of uncertain innovators, investors increase the probability of success while remaining true to the Dhandho philosophy of achieving maximum upside with minimal downside risk.