Hi, everyone, it's Michael here and I'm back again with a new book and new chapter. Alright, so I actually I'm doing, I'm researching two books now. First is The Essays of Warren Buffett. And second is the Dhandho investor. So this book, I've been recommended by a fellow guy from Twitter. So it's fantastic. And it's really interesting. So I'm, I'm reading two books, and I'll be posting chapter by chapter summary of both books. So I'm going to start off with the Dhandho investor first, and it's a great book I've been written by Monish Pabrai, you should check him out. You should google. He's a fan of Warren Buffett and Charlie Munger especially, and you gotta watch his videos and talks amazing guy. I've learned a lot way a lot from him, compared to Munger and Warren Buffett. Yeah,
I mean, I'm not exaggerating. It's he's just that he's sharing some minor details and parts that Warren Buffett and Charlie Munger have never explained before. So these are the things that you can learn a plenty of things to learn. So I believe this book is going to give me a lot and to all of us as well. So let's get started. All right, okay, so, first chapter chapter one is Patel Motel. Dhandho Okay, that that's cool. All right, how it is amazing that over half of all the motels in the entire country, USA are owned and operated by Patels. So there were virtually no Patels in the United States just 35 years ago, they started arriving as refugees in the early 1970s. Without much in the way of education or capital. So Patels as a group today own over $40 billion in motel assets. In the United States. They pay over $725 million dollars a year in taxes and employ nearly a million people how they small impoverished ethnic group come out of nowhere and end up controlling such vast resources.
There is only one explanation one word, Dhandho. I don't know Am I pronouncing it right? dhandho? It is pronounced as dhan, doe, is a Gujarati word that comes from the Sanskrit root word Dhana Dhana, meaning wealth than do literally translated means and the words that create wealth. The street translation of Dhandho is simply business. So that's the explanation of it. And then Dhandho, is all about the minimization of risk while maximizing the reward? Wow, I love this riskless Mets idea. Thunder is best described as a universe that create wealth while taking virtually no risk. dando is capital allocation and it's very finest. So Dhandho is how the Patels have exponentially compounded their net worth over the past 30 odd years. Wow, that's, that's awesome. That's a lot that have been that immense amount of hard work the Patel's and Ismailis the backstory, have been a very entrepreneurial community for centuries, they came to control a large proportion of the businesses in Uganda. So general Idi Amin, he came to power in Uganda as a dictator in 1972. He declared that Africa was for Africans and that non Africans had to leave. Okay, so that's the tough part. And that's an opportunity for them. So what happened is that a total of 70,000 Gujaratis were just stripped of virtually all their assets and thrown out of the country to the end of 1972. The vast majority of the Patels and the Ismailis were allowed to settle in England and Canada. A few thousands families were also accepted by the United States as refugees. Awesome. The first few Patels, who arrived in the United States went into the motel business. I'm curious why they have to get into the motel business. The reason we end up with concentration of ethnic groups in certain professions is because role models play a huge role in how humans pick their vocation. So why motels? Yeah, that's the question why?
Many small motels are heavily basically are dependent on discretionary spending. So many small nondescript motels for foreclosed by banks are going on sale at distressed prices. So this is the part where Papa Patel, he comes in so Papa Patel in 1973. Basically, have been kicked out out of Kampala, Uganda, and landed here in USA so with the family to feed, he figures out that the best he can do with his strange accent and broken English speaking skills will be a job bagging groceries at a minimum wage. So Papa Patel sees the small 20 room motel on sale. If he buys it. The motivated seller or a bank will likely finance 80% to 90% of the purchase price. His family basically can live there as well, and their rent will go to zero. Between himself and his close relatives. He raised about $5,000 in cash and buys the motel. It required only a small investment and it solved accommodation problem because he could live his family could live and work there so you don't need any employees as well. Mama and Papa Patel work long hours on the various motel chores and the kids help out during the evenings, weekends and holidays. That's amazing.
Papa Patel's motel has the lowest operating cost of any motel in the vicinity of course you have no employees, he can offer the lowers nightly rate and still maintain the same or higher profitability room then his predecessors and competitors. His competitors experienced severe pressure on rates leading to a spiraling reduction in occupancy and profits. Yeah, of course, because the low cost that they have introduced because of in profitability can be increased, they can match their price. So Mr. Patel has annual interest expenses of about $5,000 principal payments of $5,000. And another $5000 to $10,000. In out of pocket expenses for motel supplies, maintenance and utilities, total expenses, others under $20,000. Even if the family spends another $5,000 a year for living expenses, that's big sum. Papa Patel nets over $15,000 a year after all taxes and all living expenses. So this is the genius. The annual return on that $5,000 of invest capital is a stunning four hundred percent, which is a $20,000 in annual returns from the investment $15,000 in cash flow and $5,000 in principal repayment. If he borrows the $5,000 from a fellow Patel, the return on invested capital is infinite, zero dollars in and $20,000 a year out. That's all fine and dandy, you might say but what if the business does not work? What if it fails? See Papa Patel has only $5,000 or less to his name, so the personal guarantee is meaningless. If he's unable to make the payments. The bank can take over the property but yes, virtually no assets outside of the motel. The bank has no interest in taking over the motel and running it of course, it has no such competency. It will be very hard for the bank to sell a money losing motel and cover their note. The bank's best option is to work with Papa Patel to make the motel profitable so the bank is likely to renegotiate terms and try to help Papa Patel get back on track. Genius Dhandho, this is totally Dhandho. I don't know if I'm pronouncing it right or not. But then obviously, this is not a risk free bet. But it is a very low risk high return bet. Heads I win. Tails I don't lose much beautiful.
With such a high cash flow coming in. Papa Patel is soon flush with cash. He still has a very modest lifestyle. His eldest son comes of age in a few years and he ends up with a motel to him. The family buys a modest house and goes hunting for the next motel to buy. This time a bigger motel with 50 rooms. The formula is simple, which setting on keeping costs as low as possible, charge lower rates than all competitors, drive up the occupancy and maximize the free cash flow. Finally, keep handing over motels to up and running Patel relatives to run while adding more and more properties. There is a snowball effect here very big one in overtime. We end up with this amazing statistics. Half of all motels in the United States under Patel ownership. The Patels have begun buying high end hotels and have delved into a number of businesses where they can apply their low cost operating model for unassailable competitive advantage. For example, gas stations, Dunkin donut franchises, convenience store 7-11s and the like. Amazing. This is a great chapter. This is the start of this book and first chapter of this book and that is have a good midway.
So the idea is that Papa Patel is a genius. Yes, he is a genius He has created he has become a role model for the other Patels. And they followed him. It's amazing. So I can't wait for the chapter two and chapter two is about Manilal Dhandho, I have no idea what is that? And next part will be I'll be I'm going to the essays of Warren Buffett as well. So can't wait to finish all the math and I have plenty of books to read. It's going to be a great journey. So thanks a lot and thank you for listening and do follow me do like on do leave a comment will be leave your suggestions and feedback or let's discuss about this concept. Amazing. Thanks. And thank you, Monish, for writing this wonderful book. Thanks a lot. See you all soon. Bye bye. Subscribe.
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