Wednesday, April 22, 2015

The PATEL way in BUSINESS and INVESTING

Here's a statistic that will fill your heart with pride. Did you know that a study done few years back had put the Indian origin Patels as owners of around 21,000 hotels and motels in the US? That's a staggering 42% of the US hospitality market and a combined worth of US$ 40 bn! 

However, it wasn't always like this. The so called 'Patelisation' of the US hospitality industry traces its roots to the 1970s when Patels in large numbers landed on US shores from Uganda, where a certain dictator stripped them of their enterprises and drove them out. 

When they finally landed in the US, their woes were far from over though. The US economy was undergoing its own bleak period on account of the oil crisis. The motels industry was one of its most damaged. But this is what the Patels set their sights on. Their game plan was simple. Get the banks to finance a chunk of the purchase price of motels and then move into them with their extended families. Doing this served two very important purposes. It not only eliminated the accommodation costs but the entire family could also double up as the motel staff. 

The end result was a potent mix of low cost operations and an asset base that was in place with almost negligible capital cost. Needless to say the competition found it hard to put up a sustained fight. And one by one, a lot of the motels came to be owned by the Patels, making them a dominant force in the industry. 

Perhaps oblivious to them, the Patels were using a 
time tested investment strategy. One where the focus is not on making huge gains but on trying to minimise the losses as much as possible. It was a classic case of what ace investor Mohnish Pabrai calls, 'Heads I win, Tails I don't lose much' approach to investing. 

By starting the enterprise with very little of their own capital, the Patels ensured that downside was as good as non-existent. Please note that they did not worry about the upside too much as in how much revenues they can make. Their only aim was to not lose much should things don't work out in their favour. 

If you thought the Patels were the only ones adept at this, let us tell you that as per Pabrai, even business leaders ranging from Richard Branson to L N Mittal have minted their billions using this very same approach. The approach of trying to minimise the downside so that the upside can take care of itself. 

Does this ring a bell? It does, isn't it? After all, this is the mantra that 
Warren Buffett also seems to live by. Remember his famous two rule quote for investing? Rule number 1, don't lose money and rule number 2, always remember rule number 1. 

In fact, a recent quote from a famous investor called Joel Greenblatt is pretty much along similar lines. In an interview, he offered the view that his largest positions are not the ones that he thinks he is going to make the most money from. Instead, his largest positions are the ones where he thinks he is not going to lose money in. 

Now this is something that certainly doesn't strike as natural to majority of investors out there. They are of the view that 
successful investing is all about finding stocks that literally hit it out of the park. In other words, successful investing is all about finding the next big multi bagger. 

However, as Greenblatt and the Patels and the Bransons we just highlighted show, the idea is to bet in such a way that even if one is wrong, one does not lose too much. Of course there's nothing wrong in trying to plunge headlong into trying to find that next multi bagger. 

However, if you are looking for market beating results from your investing with a lot less stress and risk taking, then your portfolio needs to consist mostly of stocks where even if you are wrong, you don't lose a great deal. 

Trust us, if history is any indication, there's very little chance you will walk away disappointed with this approach over the long term.

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