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Over time, as these motels prospered, they took the capital it was generating, and they kept buying more motels and kept handing them over to family members. The underpricing led to higher occupancy, and even though they were underpricing, they were making just as much money or more than their competitors. The competitors had a difficult time matching the Patels, because matching the Patels meant you would lose money. When a Patel took over ownership of a motel in a given area, they would quickly survey who their competitors were and what they were charging, and then they would underprice versus all their competitors.
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On top of that, they were able to run these places more cheaply than anyone else. The bank could loan them maybe 70% or 80% of the purchase price.
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The third was they could lever their investment. The second is it would give employment to almost the entire family, because hotels are labor intensive with room service and maid service and all of that.
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One is it gave them essentially a free place to stay because they would take a couple of rooms and the family would stay there. Buying a small motel did a few things for the family. They didn’t have much money because a lot of their assets were confiscated by the state. The Patels had a specific approach when they got into the motel business, which is that they were not interested in taking risks. It needs to be in your DNA for several generations to operate like that, which is why they keep gobbling up more and more share. It’s very difficult for non-Patels to compete with Patels on cost. Low cost is going to give you an edge in pretty much any business you go into. They’ve done a masterful job because in all the cases, whether it’s a motel or any of these other types of hotels, their competitive advantage has always been lowest-cost operator. They used to be only in the low-end motels, but now they’ve gone into the Marriotts and the Hyatts and the Hiltons. The second thing that has happened is the Patels have moved upmarket. That number is probably approaching north of 70% or 75% today. Of all the motels in the U.S., approximately half of them were under Patel ownership about a dozen years ago. When I wrote the book 12 years ago, the Patels had 40% to 50% market share. in the 1970s as refugees because they were being evicted from East Africa, from Uganda. One of the first examples I used was the Patels who came to the U.S. I took the view in the book that if there’s a lot of cross-pollination between being an investor and being a businessman, why don’t we talk about some businesspeople, because the way they approach capital allocation and running a business directly dovetails into how an investor ought to look at their investment decisions.
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If you have an investment manager who’s had experience running one or more businesses, they have a significant leg-up over their peers. That’s a serious handicap because they’re missing a significant framework.
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Unfortunately, most professional money managers have never run a business before. Taking a step back before we delve into the Patels, for me, the starting point of interest in value investing was a quote by Warren Buffett where he said, “I’m a better investor because I’m a businessman, and I’m a better businessman because I’m an investor.” The parts of your brain that get used are the same, whether you’re running a business or making portfolio decisions, and the frameworks are similar. In fact, in a number of conversations with Charlie Munger, he always brings that up and reminds people never to try to compete with the Patels in the motel business. Pabrai: The Patel story is a great one because it illustrates the concept really well. Could you tell that story, or if you prefer, give another illustration of what you meant with this concept. John Mihaljevic, MOI Global: The classic example that I think most know is the Patel story in the hospitality business as an illustration of what Dhandho means. They recently came out with an edition in India, which sold very well ― vastly better than expected. It was a useful exercise for me, and I’m happy to get a nice check from Wiley every year. I found that the process of writing the book helped me formalize the principles inside. As they say, the best way to learn is to teach. Mohnish Pabrai: My objective in writing The Dhandho Investor was to crystalize some concepts in my own mind. The following transcript has been edited for space and clarity.