In this post, we are going to look at some important points from The Dhandho Investor Book. This book is written by Mohnish Pabrai, who manages Pabrai funds. he has made several investments internationally including the US and India.
Dhandho Investor Book :
We are going to see the 4 most important points from this book with an example :
1) Buy An Existing Profitable Business
2) Buy An Asset At A Bad Time
3) Check The Competitive Advantage Of Business
4) Check Risk In Business
Let’s start with the Patels story. The business in Gujarat was always doing well but eventually, the number of people started increasing. As the territory was limited and the number of people kept increasing, Patels decided to shift to another location such as the UK, Canada and the USA.
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If we check the Patels living in the USA, a big part of them is motel owners. This was a very interesting pattern and there is a reason behind it. The motels mean roadside hotel designed for traveling people.
The most important factor in motels is price because everybody just needs a place to sleep and nobody expects anything luxurious. So now we need to understand why Patels started entering the motel business?
As they had a very big family, they needed a place to stay and some money to survive. So their final decision was to enter the motel business because it’s a very simple business to understand. It’s profitable and it has existed for a very long time. and this is the first rule in the book.
You need to buy an existing business. You should always look for profitable existing businesses like motels in this case. but there was one more advantage. When Patels came to the USA, there was a recession coupled with high gas prices. Existing motels weren’t getting many customers and they were barely profitable.
Owners who had financed their motel weren’t able to pay back the money and the bank had to take their assets. Patels realized that they could get these motels at a discount because nobody was interested in them.
But Patels didn’t have many assets or money. So they paid a small amount and they were able to get a loan for the motel. and this is the second rule. When you buy an asset at a bad time, you will get it for a cheaper price.
So now that the Patels had the motel, what happens next is even more interesting. and keep in mind that they will always have some competition in the same area. they had a very simple strategy. Patels already had a big family.
As you already know, you need someone for service, laundry and desk to be there at every moment. while other motels had many workers for each job, Patels were able to reduce their cost as the whole family was working and they didn’t hire workers.
The family members needed a place to stay anyways and you don’t need to give them any salary. so they were able to keep their expenses very low. So, if a competitor would give a room for 60 $, Patels would offer it for 50 $ because their expenses were very low.
And this is really important because the price is very important in the motel business. and this would help them get customers from their competitors as well. In the end, Patels were able to make this profitable.
This is the third rule. When you evaluate any business, you should check the competitive advantage of it. In this case, they were the cheapest. but one more point is important here, being a low-cost player is important but you have to see the durability of this advantage.
Let me explain. For example, Imagine another Patel decides to open a motel in front of an existing Patels motel, then they will be directly competing with the same strategy. Patels had a solution for this, They didn’t use to open 2 motels in the same zone as they had the same strategy.
So you always want to see the advantage and the durability of that advantage. So now you know all the rules and why Patels were so successful. They were able to get it at a cheap price and they were always the cheapest.
But you should also keep in mind that your risk should be very low. What would happen if they start the motel business and they don’t succeed in it? Let’s understand the downside.
So let’s think one Patel took a loan but they weren’t able to make it profitable. What happens next? They would explain the situation to their banker. The bank knows that nobody is interested in buying the motel anyways.
So they will probably help them refinance to allow them to pay later. Keep in mind that the bank is not interested in running that business. so the Patels are their only option as they can keep their expenses very low. and the bank will eventually help the Patels.
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But let’s imagine the worst-case scenario: they aren’t able to run the business and they lose all the money they had invested.
And Patels came with nothing so they didn’t have much to lose, so they only paid a small amount to the bank and they would lose that. they would work in some shops for a while, save money and buy another motel and try again.
Because nobody was interested in them so they know they can get it for a cheap price and it’s a profitable business. as their expenses are always low so they would save and approach the bank. They know the bank wants to sell it so they will only pay a small amount.
So, These are some important points from Book The Dhandho Investor by Mohnish Pabrai. I hope you have learned something from these points. If you want to buy this book you can do so by clicking on the link below.
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