Dhandho investing for dummies
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So, when the Patels migrated to the USA, they had very little cash. They did odd jobs in the beginning. The Dhandho Investor in him knocks his senses. The interesting thing to observe here is, why would the bank let the Patel take over? Their best bet is someone who wants to buy and run it. So that they can go back to collecting interest payments.
As a result, when Patel approaches the bank, they give him what he wants. Patel now has a room motel all for a family of 5 people. Simplistic lifestyle coupled with doing all the chores by themselves, they were able to keep the expenses low. Since their expenses were low compared to other motels, they reduced prices.
Patel made good returns on the investment made. He will be able to repay the loan within 2 years to do this. Keep expenses low. A Higher Return on Capital i. The Motel just takes off and Patel pockets insane returns. So, the downside is not that bad but the upside is insane.
And on the back of such examples, he introduces the Dhandho Framework. Below I will be discussing each rule in the Dhandho framework and add my perspective to it. So as an investor, it makes sense by buy businesses that are already staffed, which is already having a sales channel established and business model figured out. Where can you buy such businesses?
In the stock market. Technically each share is entitled to get INR 1 as a profit. So as to be able to predict how the cashflow would be and in turn calculate the intrinsic value. In this time and age, technology is disrupting each and every sector. So we need to be cognizant of the fact that businesses are going to change.
Rule 4: Buy Businesses with a durable competitive advantage This rule should actually be followed along with Rule 3. A business that has a durable competitive advantage and is currently in distress is a perfect buy opportunity.
Rule 5: Bet heavily when the odds are overwhelmingly in your favor I think this rule is applicable to a lot of things in life. When you love something, give it all you can. So, when you find a distressed business with a durable competitive advantage, bet heavily. Pabrai suggests using the Kelly Formula. This formula helps to determine how much of your cash you should bet on this business.
But I like to see arbitrage as the ability to capitalize on the difference between the two markets. The best example I can think of it is the inception of Flipkart in India, inspired by Amazon. The founders saw that difference and capitalized on it. Rule 6: Buy Businesses at big discounts to their underlying intrinsic value.
This is a no brainer. But how do you calculate intrinsic value? Hint: Subscribe to get that blog post in your email directly This principle is fundamental to Dhandho Investor and Value investors alike. Rule 7: Look for low risk, high-uncertainty businesses. Of which this is the only option that constitutes the Dhandho investing framework.
High uncertainty situations mean higher fluctuations in pricing. Rule 8: Better to be a copy cat than innovators. The Patels came from India to American in the early s with no education and no money. Travel is a discretionary expense. When money is tight, you skip the vacation. As a result of the recession, hotel occupancy rates were very low, leading to bank foreclosures and fire sales. In other words, the Patels could get into the motel business for very, very cheap.
Papa Patel realized that with the bank highly motivated to sell a distressed asset, they were willing to finance 80 or 90 percent of the buy price. Plus, he could house his entire family in a few of the rooms, and they could help run the business. If they go broke, Papa Patel and his wife could always bag groceries, work overtime, and save up some money to try again.
It was a low risk, high reward bet. For a few thousand dollars down payment, Patel buys a motel. Without having to pay for staff Papa Patel and his wife handle all the work , the Patels have no expenses. Combine that with their extremely frugal lifestyle, and the motel quickly turns profitable. After a few years, Papa Patel now has enough cash to expand his business. He buys another motel and staffs it with other family members who have landed in the United States.
This process repeats itself until the Patel family owns over half of the motels in America while branching out into luxury hotels, condos, gas stations, convenience stores, and more. I took this photo at a Best Western in California City in I was pumped to see it was owned by the Patels! See, Papa Patel was fanatical about five things: Keeping costs as low as possible. Undercutting his competitors with lower prices.
Keeping occupancy high. Maximizing free cash flow, and Handing new motels to recently immigrated Patels who can repeat the process. Patel was the low-cost producer in the motel business - this was his moat. He was able to keep costs lower than anyone else in the industry and used that edge to build an empire.
After Branson successfully built out his music and record distribution company, he was handed a proposal in for an airline specializing in first-class service between New York and London. He was weary. But he was curious. The plan stated that the current airlines were underserving this route. Either they were bad at their business unlikely , or there was so much demand for that flight that the phones were always busy. Branson saw an opportunity. He changed the plan from a business-service only airline to one with a unique dual-class service and got to work.
First, he made a call to Boeing and got a quote for leasing a jumbo jet. His record company was highly profitable. From a capital needs perspective, he would get paid for the tickets before he needed to pay out for fuel and staff wages. This was a low risk, high reward bet. So, he started the airline. By the time his competitors realized there was a service gap to fill, he was well ahead of them with a great brand and a unique experience for a niche market.
Branson went on to make similar bets with Virgin Mobile acquired by Sprint , a Virgin Mortgage brand, and more. Richard Branson started the Virgin Atlantic airline service with the Dhandho approach to business.
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Combine that with their extremely frugal lifestyle, and the motel quickly turns profitable. After a few years, Papa Patel now has enough cash to expand his business. He buys another motel and staffs it with other family members who have landed in the United States. This process repeats itself until the Patel family owns over half of the motels in America while branching out into luxury hotels, condos, gas stations, convenience stores, and more.
I took this photo at a Best Western in California City in I was pumped to see it was owned by the Patels! See, Papa Patel was fanatical about five things: Keeping costs as low as possible. Undercutting his competitors with lower prices. Keeping occupancy high. Maximizing free cash flow, and Handing new motels to recently immigrated Patels who can repeat the process. Patel was the low-cost producer in the motel business - this was his moat. He was able to keep costs lower than anyone else in the industry and used that edge to build an empire.
After Branson successfully built out his music and record distribution company, he was handed a proposal in for an airline specializing in first-class service between New York and London. He was weary. But he was curious. The plan stated that the current airlines were underserving this route. Either they were bad at their business unlikely , or there was so much demand for that flight that the phones were always busy. Branson saw an opportunity. He changed the plan from a business-service only airline to one with a unique dual-class service and got to work.
First, he made a call to Boeing and got a quote for leasing a jumbo jet. His record company was highly profitable. From a capital needs perspective, he would get paid for the tickets before he needed to pay out for fuel and staff wages. This was a low risk, high reward bet. So, he started the airline. By the time his competitors realized there was a service gap to fill, he was well ahead of them with a great brand and a unique experience for a niche market. Branson went on to make similar bets with Virgin Mobile acquired by Sprint , a Virgin Mortgage brand, and more.
Richard Branson started the Virgin Atlantic airline service with the Dhandho approach to business. After researching bankruptcy law in the U. The downside was low, while the upside was massive. Pabrai worked on his business in the morning before his day job from a. With a paycheck coming in regularly and minimal expenses, he was free to focus on building his business for the longterm. The business grew nicely. Pabrai sold it for several million dollars in The return was over 65 percent annualized over ten years.
Transtech was basically a risk-free bet. At 25 years-old, Pabrai had nothing to lose. You can see every one of these elements present in the story of Papa Patel. The Patels built their motel business with the Dhandho framework. We cannot understand how an investment house can be intellectually honest and have dozens of funds and offerings. Yet this is unfortunately how this industry typically functions. By providing dozens of offerings and strategies, other investment shops are able to constantly promote a new "flavor of the month.
But, as soon as the performance of that fund wanes, predictably enough, it is no longer promoted and instead another fund is pushed, the one that now has recent good performance. Investors are prone to be misled by these ads and what they suggest, and as a result are inclined to keep switching among funds.
We believe the end result of this strategy is likely to vastly underperform an alternate strategy of just sticking with the same simple, broadly diversified fund for the long haul.
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