The Dhandho Investor: Lessons from the Patel Motel Success Story
The Dhandho Investor: Lessons from the Patel Motel Success Story
Mohnish Pabrai, a well-known Indian investor, is admired for his sensible approach to wealth accumulation. He points out accumulating wealth while minimizing excess risk.
One of the key lessons that Pabrai emphasizes is the importance of focusing on truly outstanding investment opportunities. He explains this lesson through the inspiring story of the Patel community in America. Pabrai highlights how the Patels, a small Indian community, dominated the motel industry in the United States. Through hard work, perseverance, and careful investment decisions, the Patels achieved remarkable success despite facing numerous challenges along the way.
The Patel family, originally from the Gujarati community in India, faced challenges due to land division, leading them to relocate to Uganda. Thriving there, they amassed considerable wealth. However, the political landscape changed in the 1970s when a dictator came to power, forcing them out. The family dispersed globally, and those in the U.S. seized an opportunity in the struggling motel industry.
During the 1970s, high oil prices curtailed travel in the U.S., causing a downturn in the motel business. Sensing an opportunity, the Patels, with a meager initial investment, purchased motels at discounted rates as banks auctioned off properties. Their efficient operation, including living on-site and family members running the motels, led to significant cost savings.
As the crisis ended, the motel industry flourished, with revenues boosting by 40-50% each year, helping them to gain more than 70% share of the US motel market. The Patels' success highlights Pabrai's basic investment philosophy, which rewards proven businesses with minimal entry barriers.
The Nine Principles to Becoming a “Dhandho Investor”:
Focus on Existing Business:
The Patel family's story shows the value of entering an existing firm without excessive innovation. Doing an existing business that follows a predetermined pattern is a lot easier than trying to disrupt the pattern of the consumer by introducing something new to the market.
Let’s take the example of Coca-Cola, one of the best investments of Warren Buffett. It sells 1.9 billion servings per day, and people have been having this for more than a century. This kind of business can survive for upcoming decades as well. On the other hand, say some new tech company comes up with a new product, even if the product is fantastic, you will never know if it will survive even this decade or not.
Buy a Simple Business:
If a smart investor chooses between investing in Amazon or Patel's motels using the Dhandho logic, they would likely lean towards the simpler option—the motel business. Yes, Amazon is much more valuable and has exciting opportunities in our fast-changing world. But, predicting Amazon's future earnings is tricky because we can't be sure how its business will evolve.
On the other hand, motels have a high predictability factor for their income, money flow, and profits. When we can easily predict how much money a business will make, it tends to be more valuable. Motels, with their straightforward business model, offer this predictability. So, for a Dhandho investor, the simplicity and clear value of the motel business make it the obvious choice.
Buy a Distressed business in the distressed sector:
Remember when Patel decided to buy his first motel? It was kind of like shopping for a fixer-upper house. Similarly, Lakshmi Mittal saw an opportunity in the steel sector when things were not going well. He thought, "Bad news for others could be good news for me." So, he went on to buy struggling steel plants and companies.
Now, spotting a distressed business, or one that needs some help, is like finding out about a sale in a store. You can keep an eye on business news or check out reports from places like Value Line, Portfolio Reports, or Value Investors Clubs. These sources can give you hints about businesses that might need a bit of fixing but could turn out to be great investments.
Durable Moats:
Think of Patel's motel as having a special shield—their superpower is being the lowest-cost player. This superpower allows them to offer lower prices without losing their money-making abilities. Once you have this shield in place, it's really tough for others to compete because your prices are low, and you're still making good money.
Other than that, a company's moat can be its brand names like Apple Inc. and Nestle, its networks like WhatsApp, or its product that is hard to replicate by the competitors.
Bet big when the odds are in your favor:
Warren Buffett is a master at making strategic moves—placing big bets but wisely choosing when the odds are on his side. Warren Buffett is like a pro gambler. Back in 1963, when American Express faced a big problem and lost a lot of money, Buffett saw a chance. Even though everyone was scared and the company's stock price dropped by half, Buffett wasn't afraid. He invested a whopping 40% of his company's money in American Express.
Buffett thought the real value of American Express was way more than what its stock price showed. He believed in the trust people had in the company and its charge card business, not in the temporary issue with it.
Mastering Arbitrage:
Arbitrage is like taking advantage of price differences in things—it could be because of location, time, or other factors. However, like a superpower that weakens over time, as more people catch on, arbitrage becomes less powerful. Patel's motel had an arbitrage advantage because of its low operating costs, leading to lower rents. Competitors couldn't match Patel's rental rates without hurting their profits.
Discount Buying:
According to smart investor Benjamin Graham, having a "margin of safety" means you don't need to perfectly predict the future. Patel might not have read Graham's books, but he did the same thing. When he bought his first motel (which was not doing so well), he paid way less than it was actually worth. This minimized his risk and gave him a safety cushion. The Dhandho investor believes that lower risk often means higher rewards.
Low Risk, High Uncertainty:
There are different levels of risk and uncertainty in business. The Dhandho investor likes the combo of low risk and high uncertainty. While the stock market usually favors companies with low risk and low uncertainty, the Dhandho investor looks for opportunities in the third quadrant—low risk, and high uncertainty. These companies might have lower stock prices, but they can be valuable investments with high intrinsic value. Patel's motel is an example—low risk due to predictability but uncertainty about economic conditions.
Copycat Success:
Being a copycat isn't always a bad thing. Ray Kroc didn't invent McDonald's; he saw what the McDonald brothers did and made it bigger. Microsoft didn't create the first internet browser; Netscape did. Copying, or "lifting and scaling," can be a smart move. It's safer than inventing something entirely new, which carries more risk. The Dhandho way is about copying successful ideas. That's how the Patels became leaders in the motel business within 30 years of arriving in the U.S.
