Hello friends, in today’s article, we see the second chapter of the book Dhandho Investor by author Mohnish Prabrai. in this chapter Mohnish Pabrai is On Manilal Dhandho. so let’s see
Chapter 2:-Mohnish Pabrai On Manilal Dhandho
In this chapter, we see the whole of Manilal who is a simple middle-class man who becomes a motel-business owner, this story is different than the other Patel. this story definitely helps you to understand the Head; I win, and tail; I don’t lose many concepts. and also help you to understand the value of investing, and help you to find undervalued businesses.
the author says, ” Manilal is an unassuming, pleasant 54-year-old guy, who comes across as a very honest hardworking, and likable fellow. He was born and raised in Gujrat in a family with four brothers and two sisters.
One of his brothers had migrated to the United States in 1970 and had settled in the San Francisco Bay Area.
Manilal had trained and worked as an accountant in India. in 1991, his brother sponsored him, and he was able to get his U.S. Green Card and migrate to the united states with his wife and kids.
He arrived in San Fransico with virtually no Cash or Assets. His brother hosted them, and Manilal began to look for a job so he could support his family. Manilal spoke English before he come to the united states and had already been in the united states for 15 years when we met. (Mohnish Pabrai On Manilal Dhandho)
Even, so I found it hard to understand Manilals broken and heavily accented English, especially in our phone conversations. it was easier in person, but it would have been a huge liability for him 15 years ago in the job market.
with no prior US job experience or references and his English language handicap, he had difficulty finding a white-collar accounting job and eventually abandoned that futile effort.
Manilal was under pressure to earn money to support his family. he was now pretty much ready to take any job at minimum wage. In early 1990, the united states were in a deep recession and that made it all the more difficult.
Manilal’s first job was at a gas station at minimum wage. His work hours were 3 PM to 7 AM – 16 hrs a day, 7 days a week. He was working 112 hours a week.
Through the grapevine, he heard that there was a computer power supply manufacturing company in southern California, Cherokee International, owned by a fellow Patel that was growing and adding staff.
Manilal interviewed with Cherokee and got a job there. he moved his family to southern California and his brother lent some financial support as they got settled. (Mohnish Pabrai On Manilal Dhandho)
After starting at Cherokee, he worked full-time and put in all the overtime the company would allow. Cherokee Recognized some of his accounting skills and put him in the stock room helping out with inventory management.
the pay was a little over minimum wage. his remaining two brothers and one sister ( and all their families) joined him in a few months.
They all lived together in a small apartment and in short order nearly all the adults had assembly line-type jobs at Cherokee.
One brother was single. With severe adults. the paychecks began to flow in and Manilal and all his siblings started saving in earnest. their first objective was to get a larger place and they decided to buy a house. in 1994, they pooled their savings- about $60,000, and bought a house in the pleasant town of Foothill Ranch, California, for $203,000 also, in 1994, Manilal took a second job at a Texaco Gas Station.
He now worked from 8:00 Am until 5:00 PM at Cherokee and then from 5:30 Pm Until 11:00 PM at the gas station.
The Persian gas station owner recognized Manilal’s integrity and hard work ethos, and he made him the de facto manager of the gas station. (Mohnish Pabrai On Manilal Dhandho)
Besides his wages, he gave Manilal 10% of the gas station’s net profit. Manilal managed the place like an owner. He hired and fired staff as required and made sure the gas station ran without a hitch.
Manilal become intimately Familiar with the gas station business, the Margins on Various Items the overheads, how much money the business made, and so on.
By 1998, the Chaudhari had bought a condo for his sister’s family and another home in Foothill Ranch for $169,000. they continued to live very simply. from the beginning, the four sibling families had agreed to put $500 a month per family into a common savings account.
This pool funded the initial down payment for their first home. For subsequent purchases, they also drew down on this pool. they all lived very simple lives and worked around the clock. as a result, there wasn’t much free time to spend on entertainment.
Manilal told me that tye traveled a fair amount during the first two years, hitting the usual tourist spots. After that, they didn’t have much interest in traveling and all of them worked long hours with a great deal of overtime.
Even with very low wages, they were each socking away several thousand dollars a year. In 1998, Manilal decided that he wanted to buy a small business with his extended family. he considered gas stations, liquor stores, laundromats, and such. The Texaco gas station employer supported his goals but told him not to look at liquor stores due to the high crime and headaches
Some Patels suggested motels, but in southern California these now cost millions. he kept looking for a business to buy, but was unable to find one that felt right. he was patient, in 2001, after 9/11, the travel industry went into a major slump and motel occupancy and prices declined significantly. (Mohnish Pabrai On Manilal Dhandho)
Cherokee had money Patel employees one of them Ashok Patel was a vice president at the firm. he liked Manilal and told him he’d love to invest some money with him in a business that Manilal might run.
After 9/11, Manilal comes across the best Western motel for sale in Moreno Valley for 4.5 million. It was spectacular properly on nearly three acres right off the highway. they needed to put about $1.4 million down to buy the property.
Manilal and his siblings had all of $225,000 in savings. they also had the ability to get about $125,000 through home equity loans, on their now-appreciated homes.
the deal they struck was that the Chadhruris would own 25% of the motel and put up $350,000 in cash. Ashok Patel invested about $252,000 and got an 18% interest.
Three other friends of Manilal Each invested $2,66,000 and each received a 19% interest.
Manilal told me that he was deeply skeptical about handling his money to anyone in any type of business endeavor. However, this was a deal where he was going to manage the motel and in effect, his investors had handed him the money.
I told him Pabrai Funds worked the same way- I don’t need to do too much due diligence on my investors because I’m getting their money, and not vice-versa.
Manilal quit his Cherokee job and began running the motel full-time. he received a salary and the profits were split, among the partners in the proportion of their ownership. (Mohnish Pabrai On Manilal Dhandho)
Let’s fast forward four years. the motel’s market value is now over $9 million – a 100% increase. But wait. over the four years, some of the $3.1 million note has been paid down.
let’s assume about $200,000 was paid down every year, so now the note is due $2.3 million. their $1.4 million is now worth $6.7 million. that’s an annualized return of a stunning 48% a year.
Hold on there’s more he hasn’t Calculated the dividends this investment has yielded over the past four years. When Manilal took over the motel in 2001. Average occupancy was under 60% and the average nightly rate was $55, yielding gross revenues of under $1.6 Million.
and The average occupancy now is worth 65% the average rate is about $70, yielding gross revenues of about $2.1 million.
Revenue has increased by about $500,000 over the past four years. I’d guess that underlying costs have increased by perhaps only $150,000. the motel is likely generating $800,000 + in free cash flow Annually- after paying Manilal a handsome salary.
Let’s examine the economics here, from Manilal’s Vantage Point. his Salary is at least $50,000 a year- a big step from his Cherokee and gas station days. His Family’s $350,000 investment in this ” motel Bond” yields an Initial annual Coupon of about $125,000 a year. (Mohnish Pabrai On Manilal Dhandho)
It has increased by about $25,000 a year and today is about $200,000. Initially, this bond paid a 36% coupon, and currently, the coupon is 57%.
In addition, if they decided to sell this bond today, they wouldn’t just get back the $350,000 but nearly, $1.7 million – about five times the initial investment in four years.
Manilal is busy these days with the construction of a new Holiday Inn Express in Chino Hills, California. he bought the land for $1.3 million and expects it to cost about $8 million in aggregate.
Revenue is expected to be around $2.3 million a year. he was understanding, and reticent to give me all his financial details, but I suspect the best western has been refinanced and the investors have gotten their money out and then some.
the refinancing, along with the robust cash flows from Best Western, is funding Chino Hills and other projects.
The family has started to set up independently owned properties by the siblings. One brother and the sister each own and run small motels in Utah.
Both properties have about 40 to 50 rooms, and they were purchased with about $250,000 down. Each sibling and spouse quit Cherokee as they started running motels. One brother still works at Cherokee. Manilal still lives modestly in the same footHill Ranch House he bought in 1994.
The kids have all done exceptionally well- they are mostly professionals- doctors, dentists, and so on. his daughter is now 32. She is married with two kids and recently bought a small motel in Utah. As well, which She manages with her husband. (Mohnish Pabrai On Manilal Dhandho)
now that’s what I’d call Manilal Dhandho. he worked hard, saved all he could, and then bet it all on a single no-brainer bet. Reeling from the severe impact of 9/11 on travel.
the motel industry was on its knee! as prices and occupancy collapsed, Manilal stepped in and made his play.
he was on the hunt for three years. he patiently waited for the right deal to materialize. Classically his story is all about ” Few bets, Big bets, infrequent Bets.’
And it’s all about only participating in coin Tosses, where ” Heads, I win; tails, I don’t lose much!”
so this is all about the Mohnish Pabrai on Manilal Dhandhol.