MOHNISH PABRAI 00:00
One of the first examples I used was the Patels who came to the U.S. in the 1970s as refugees because they were being evicted from East Africa, Uganda.
And in fact, what has happened in the last 12 years since I wrote the book is, the Patels have continued – so when I wrote the book they had about, you know, kind of 40% to 50% market share. Basically, all the motels in the U.S. approximately half of them were under Patel ownership about a dozen years ago. That number is probably approaching north of 70% or 75% today.
And the second thing that has happened is the Patels have moved upmarket. So what used to be them just being in the, you know, kind of low-end motels, you know, they’ve gone into the Marriotts and the Hyatts and the Hiltons.
And 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 kind of competitive advantage has always been lowest-cost operator. And low cost is going to give you an edge in pretty much any business you go into.
And it’s very very difficult for non-Patels to compete with Patels on cost. I think it will be, you know, it needs to be in your DNA for several generations to operate like that. So, which is why they keep gobbling up more and more share.
So the Patels had a specific approach when they got into the motel business, which is that they were not interested in taking risks. So they didn’t have very much money because a lot of their assets were confiscated by the state. They came with a few thousand dollars.
And buying a small motel did a few things for a family;
One is it gave them a kind of almost a free place to stay because they would take a couple of rooms and the family would stay there.
The second is it would give employment to almost the entire family, because hotels are labor intensive with, you know, room service and maid service and all of that.
And the third was they could lever their investment. And you know the bank could loan them maybe 70% or 80% of the purchase price.
So the combination of those coupled with their ability to run these places lower than anyone else. So basically, once 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 they would underprice versus all their non-Patels competitors.
And the competitors had a difficult time matching the Patels, because matching the Patels meant you would lose money. And so underpricing basically led to higher occupancy, and even though they were underpricing, they were making just as much money or more than their competitors.
So over time, as these motels prospered, they took the kind of capital it was generating, and they kept buying more motels and kept handing them over to family members and such, and a very small community.
You know, Indians make up let’s say 1% of the U.S. population. The Patels who are, you know, from a small part of Gujarat, my guess is probably less than maybe 10% of the Indian population, so you have something like 0.1% of the U.S. population controlling 75% of the motels. And anytime you see a phenomenon like that, you should ask yourself kind of what’s going on.
And so that’s kind of a quick intro to the Patels and of course, the book delves a little further into their history and their methods and so on. But that was the crux which is that, you know, you look at a business, you create a competitive advantage, and then you’re off to the races.
And in investing, you’re trying to do the same thing. You’re either trying to buy a stock very cheap so you can, you know, kind of make money when it gets fairly priced, or even better, you’re trying to buy a great business which is underpriced, and then you know that business continues to kind of increase in intrinsic value, and you do very well by holding it.
JOHN MIHALJEVIC 05:26
Mohnish, I’m fascinated by the Patel story.
One thing it seems very much understandable that when you have a family basically living in a hotel and working, that you are going to be the low-cost provider, but it sounds like they've been able or some of the Patels have been able to scale to multiple units where it can no longer be the family doing all the labor. They actually have to hire labor.
How have they still been able to remain the low-cost provider and to kind of ensure that the competitive advantage remains intact when they’re basically managing people at some point?
MOHNISH PABRAI 06:18
Yeah, so I think the game plan the Patels used was that as they started expanding, they would kind of depute one of their relatives who had been, let's say being apprentice or being trained in the “mother” motel, if you will. And you know that individual had been kind of well-versed in looking at every minute cost.
I mean what would happen typically in a non-Patel motel is, let’s say for example, you know you needed repairs to a water heater. You know they would go about doing things a certain way, but the Patels I think would have spent the time to, you know, cultivate the relationships and make sure they watch their pennies when they’re looking at expenditure.
So the key was not – for scaling was not that they were employing family. The key was that they were watching the minutiae very carefully. So they looked at every expense, kind of like you know zero-based budgeting, if you will. I mean they looked at every expense and say, "Okay, is this necessary? Can it be done a different way? Are we optimizing kind of what's going on here?" And that sort of thing.
And so the intense focus on cost was something that came very naturally to them, and it was somewhat unnatural for their competitors to be that intense on cost, and so you get an advantage.
I would say that if you – the analogy doesn't quite work but maybe it does a little bit – but like no matter how much most full-service agency insurance, auto insurance companies try, they’re going to have a delta versus GEICO in terms of cost because of the direct model. And that delta has actually grown because of the internet and so on.
So I think the Patels are just keeping their nose to the grindstone even when they have not had family members working there. And even when they’ve gone to full-service motels, I think they just watch their pennies a lot more carefully than most operators and most businesses.
JOHN MIHALJEVIC 09:00
So it sounds like it’s really a mindset that they’ve kept, and you mentioned zero-based budgeting which I think is –
MOHNISH PABRAI 09:10
Yeah, they look at every single line item with a fresh set of eyes and say, “Okay, we are not accepting any kind of old rules of how it was done under previous ownership. I want to look at you know the range of things..."
And of course, they’ve had experience running motels, and they’ve looked at every line item earlier, so they've understood very well how to optimize.
So you know each company it doesn't matter what industry you’re in, but each company has a DNA. So many companies become really good at kind of top line and growth, and you know profits growing that way, and a number of companies focus on the bottom line and they make the numbers work that way.
So the Patels have always taken a more intense interest in having a cost advantage, and then they've just used the capital that's coming in because they also live a very frugal lifestyles, so they were able to accumulate capital and help each other.
And then the banks over time became more comfortable lending to them because they just saw the historical default rates of this particular ethnic group of community was, you know, different from you know Joe Public buying motels and such. So all of that kind of snowballed into more and more of an advantage over time.
"Low cost is going to give you an edge in pretty much any business you go into." ~Mohnish Pabrai