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How The Patels Conquered America

By Dan Ferris, editor, Extreme Value
Monday, May 22, 2006

“Are there any Patels here?”

The question echoed across a large, silent room filled with hundreds of serious-minded investors.

“Patels?” I wondered to myself. “Is that what he said?... Patels?... what on earth is a Patel?” Fortunately, enlightenment was imminent.

Patels are simply people with the last name Patel. They’re from India, originally from the state of Gujarat. Under India’s old caste system, the Patels were of the Vaishya, or merchant caste. As merchant caste members, they were literally born to sell.

Many Patels found their way to the United States as refugees. Some were stripped of their worldly possessions as they exited India. Others had indentured themselves as servants, and came to America when they bought their freedom.

A typical Patel family came to the U.S. with little or nothing. They needed to make a living. They wouldn’t work for somebody else, given their long history of servitude. When most of them came here, the motel business was quite depressed. They saw an opportunity to get control of a piece of U.S. real estate cheaply and took it.

The Patels invested with very little of their own capital. A small down payment, a loan for the rest, and they were in business. Behold the true essence of an entrepreneur: risk averse, but comfortable with uncertainty. Investing in real estate satisfied the risk aversion. Doing so mostly with other people’s money allowed the Patels to be comfortable with the uncertain outcome.

The Patels created a low-cost provider economic moat by doing simple things. They’re value-minded and started with little or nothing, so they bought the cheapest properties. Then they moved in and lived on the property to lower living expenses. Then they fired all the employees and ran the motels as family-owned and operated businesses. That cut operating costs to the bone. It’s nearly impossible for a non-Patel to compete head-to-head with a Patel.

Today, the Patels own 40%-50% of all the lowest price motels. The richest East Asian in Southern California is a man named B.U. Patel. He started with 200 rooms, and today owns motels totaling 4,400 rooms. The Asian American Hotel Owners Association has more than 8,000 members. Sixty percent of them are named Patel. The group says its members own 37% of the motels in the United States. Somebody named Patel owns one out of every five U.S. motels.

I heard the story of the Patels at the Value Investing Congress held in Los Angeles, Tuesday through Thursday last week. Mohnish Pabrai told the story. Pabrai manages about $300 million single-handedly, with a focused Extreme Value-style approach.

And what stock does the man who knows all about the Patels find attractive?

Hint: It was by far the most talked about stock of the conference. Pabrai likes it, and so do the conference hosts, Whitney Tilson and Glenn Tongue, of T2 Partners.

Good investing,

Dan Ferris





Market Notes


NEW HIGHS OF NOTE LAST WEEK:

Few and far between


NEW LOWS OF NOTE LAST WEEK:

Intel (INTC)… severe tech stock decline
Amazon (AMZN)… see above
eBay (EBAY)… see above
Yahoo! (YHOO)… see above
Microsoft (MSFT)… see above
Juniper Networks (JNPR)… see above
JDS Uniphase (JDSU)… see above
Pulte Homes (PHM)… homebuilding
Ryland Group (RYL)… homebuilding
Toll Brothers (TOL)… homebuilding
Ivanhoe Mines (IVN)… Mongolian asset nationalization
iShares US Real Estate Index Fund (IYR)… real estate ETF
Coffee, Cotton, Lumber, Natural Gas

New Low of special note:

Dark clouds are forming over the U.S. real estate market…

Homebuilding stocks are getting slammed.  Mortgage rates are at 4-year highs.  And the iShares Real Estate Fund (IYR) is breaking down.

This exchange-traded fund is made up of a wide variety of the nation’s largest REITs.  It displays the conditions of the real estate market, good or bad.  As IYR’s recent price action shows, conditions are getting worse.



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