Business Today

Native Intelligence

An Indian-American fund manager serves up unique investing lessons from the 'motel Patels'.

By R. Sridharan | Print Edition: August 26, 2007

The cardinal principle of investing, great wise investors have told us, is that return is directly proportional to risk. That is, greater the risk, higher the return. But a US-based value investor and self-admitted Warren Buffett disciple thinks that's not the right approach to investing. Some of the savviest investors, argues Mohnish Pabrai, who manages Irvine, California-based Pabrai Investment Funds, have always followed a simple investing strategy: Get the maximum return with the least amount of risk. The book The Dhandho Investor is dedicated to proving that point.

The Dhandho Investor
Mohnish Pabrai John Wiley & Sons
Pp: 196
Price: Rs $27.95
(Rs 1,146)  
Pabrai, whose own funds have returned 28 per cent annualised between 1996 and 2006, makes the point through simple stories of great entrepreneurs. The biggest of them, as he tells the reader, isn't one person but a clan: the 'motel Patels' of the US. The US virtually had none of them until the mid-70s, but today they own more than $40 billion in motel assets in the country, pay $725 million in taxes annually and employ in excess of 1 million people. So how did they do it? Thanks to their low-risk, high-return approach to business.

This is how a typical Patel would go about building his motel empire: Start with very low capital, zero in on a near distress sale motel, leverage bank loan at attractive terms, put his family to work at the motel (thereby replacing paid help), perhaps even live in the motel (if the family is newly arrived and wants to save on rent, car etc), drop rates to drive up occupancy, and use the cash flow to pay off the loans. "Having fully cornered the motel market, the Patels have begun buying higher-end hotels and have delved into a number of businesses where they can apply their lowest-cost operations," writes Pabrai.

If you thought skimping it like the Patels would be hard for others, you are probably right, but that still doesn't take anything away from the basic investment philosophy of "Heads, I win; Tails, I don't lose much" that they employ. There are several other successful entrepreneurs, the author says, who pretty much use the same principle. Entrepreneurs such as Virgin's Richard Branson and Arcelor-Mittal's L.N. Mittal. Pabrai offers a nine-point Dhandho (it means business in Gujarati) Framework, which includes diktats like invest in existing and simple businesses, invest in distressed businesses in distressed industries, make few bets, but big bets, and invest in copycats rather than the innovators. The book is delightful for the simple and engaging style in which it is written. But the reason you should be reading it is the contrarian message that it carries.

The Indian CEO
By Signe M. Spencer et al
Response (Sage)
Pp: 206
Price: Rs 395
The worst thing about global management research is that it has very little on India. No doubt, there is a handful of case studies on companies, but there's almost nothing on Indian CEOs. How different is he from the typical American CEO who, invariably, is seen as the role model for others around the world? Are there circumstances and regulations that are unique to the CEO in India? What sort of local and global skills does the Indian CEO draw upon to lead his enterprise? In short, there is little academic insight into what goes into the making of a successful Indian CEO. Therefore, this book is a much-needed addition to the small but growing literature on management in India.

The book, sponsored by the Public Enterprises Selection Board (PSEB), originally intended to provide tools to PSEB improve performance at state-owned firms by matching leaders to companies more accurately, but as the authors started gathering data and insights, it occurred to them that a larger audience could perhaps benefit from their work. At the end of the book's 14 chapters, you'll discover that the successful Indian CEO is indeed different from his peers elsewhere. For one, the authors say, the Indian CEO is unique for including larger societal good as part of business decisions, deriving strength from spiritual sources, and in his compassion for others. But what may surprise you is the authors' conclusion that the private sector and public sector are more similar than different.

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