I just finished reading Warren Buffet’s 2015 annual letter to Berkshire Hathaway shareholders. If you haven’t yet read one of his letters and you’re at all interested in business and investing, I would encourage you to check them out. (By going to their website you’ll also get a reminder of what the web looked like circa 1995.)
When I read them I feel as if I’m reading a giant blog post from Warren Buffet – albeit one that only gets published once a year. They’re well-written and easy to read. They’re personal. They’re light and humorous. (He drops Tinder, the mobile dating app, in this year’s letter.) And they’re packed full of invaluable information and insights.
To give you a sample, here are two snippets that I liked:
“Our flexibility in capital allocation – our willingness to invest large sums passively in non-controlled businesses – gives us a significant edge over companies that limit themselves to acquisitions they will operate. Woody Allen once explained that the advantage of being bi-sexual is that it doubles your chance of finding a date on Saturday night. In like manner – well, not exactly like manner – our appetite for either operating businesses or passive investments doubles our chances of finding sensible uses for Berkshire’s endless gusher of cash.”
“America’s population is growing about .8% per year (.5% from births minus deaths and .3% from net migration). Thus 2% of overall growth produces about 1.2% of per capita growth. That may not sound impressive. But in a single generation of, say, 25 years, that rate of growth leads to a gain of 34.4% in real GDP per capita. (Compounding’s effects produce the excess over the percentage that would result by simply multiplying 25 x 1.2%.) In turn, that 34.4% gain will produce a staggering $19,000 increase in real GDP per capita for the next generation.”
Overall, he remains, and rightly so I’d say, very bullish on the United States: “For 240 years it’s been a terrible mistake to bet against America, and now is no time to start.”
What do you think?
I was recently talking to my good friend Jeremiah Shamess about the current state of development land sales in Toronto (he does this for a living) and he said something to me that I found really interesting.
He said that because the market is so competitive, you can really only win development sites in one of two ways. Either you’re willing to spend the most money or you see something and have a vision that nobody else sees.
And it was this second piece that really stood out to me because it reminds me of one of my favorite investing frameworks.
Warren Buffet is famous for saying that you should be fearful when others are greedy and you should be greedy when others are fearful. And what I’m about to talk about is really that same core philosophy.
Here’s how venture capitalist Fred Wilson put it (reiterating something that Bill Gurley said):
I saw Bill Gurley say that you can only make money by being right about something that most people think is wrong. His logic was that you can’t make money by being wrong. And you can’t make money by being right about something everyone else knows. So you have to be right about something that most people think is wrong. I really like that framework.
But this doesn’t just apply to technology companies or stocks. It applies to city building, most industries, and probably most things in life if you think about it.
If all you’re doing are things that everyone else is doing, then how can you expect to outperform? You’re going to revert to the mean.
Take, for example, billionaire Dan Gilbert and Detroit. Not everyone believes that Detroit will come back. In fact, I suspect there are probably more people who think it won’t come back, than people who think it will. Otherwise, it would already be back.
But Gilbert is unquestionably long on Detroit (via Forbes):
As you’ve likely heard, over the past four years Gilbert has become one of Detroit’s single-largest commercial landowners, renovating the city with the energy and impact of a modern-day Robert Moses, albeit bankrolled with his own money. He’s purchased and updated more than 60 properties downtown, at a total cost of $1.3 billion. He moved his own employees into many of them–12,000 in all, including 6,500 new hires–and cajoled other companies such as Chrysler, Microsoft and Twitter to follow.
If/when Gilbert proves to be right about Detroit, then he will have been right about something that most people thought was wrong. And because of that, he will no doubt make a lot of money.
When I was in grad school at Penn, real estate mogul Sam Zell used to come in and talk to students about once or twice every year. He permanently endowed the Samuel Zell and Robert Lurie Real Estate Center at the school and so there was a strong connection.
Because of Zell, a few of us developed a theory that the entertainment value of a talk was more or less correlated with net worth. In other words, the richer the speaker, the funnier the talk. Zell, for example, would often come in jeans, a baseball hat and a hawaiian-like shirt, and drop f-bombs all throughout his talks. You can do that sort of thing when you’re worth a few billion and you’re signing the checks.
But beyond just being entertaining, Zell shared a lot of insights about the businesses he was in, getting into (Chicago Tribune) and getting out of (Equity Office Properties). Some of those businesses turned out to be a disaster (Chicago Tribune), but others (Equity Office Properties), made him look like an absolute genius.
One business that he always liked to mention though, was the manufactured home business–also known as the trailer park business. And that’s because, as chairman of Equity LifeStyle Properties, Zell is the largest mobile-home landlord in the US. They control 140,000 sites across 32 states and in British Columbia, Canada.
The reason Zell likes this business is, quite simply, because it makes a lot of money and it's growing. There are an estimated 12 million Americans living in trailer parks. That’s probably why Warren Buffet also bought Clayton Homes–another manufactured home builder–for $1.7 billion in 2003.
But it’s not just the big guys who like this business, it's entrepreneurs at all levels. In fact, I was just reading this article from New York Times Magazine about a couple of entrepreneurs who actually setup a school called Mobile Home University. The objective is to train aspiring entrepreneurs on how to profit from poor people in America:
“The bottom line is Americans as a group are getting poorer,” he told his students — and while that’s bad news for those living on the economic fringes, it also means opportunities for those willing to take advantage of the trend.
Just how poor? Here are typical rents:
The typical tenant who rents from Rolfe and Reynolds pays $250 or $300 a month in lot rent and another $200 or $300 if also renting a trailer. “The trailer park is people’s last choice,” Rolfe says, “and we recognize that.”
Now, trailer parks are not the sort of thing that architects and planners typically like to talk about it. They’re not sexy. They’re not urban. But as the article says, these guys are providing the “dollar store” of housing and making a lot of money doing it (annual returns of approximately 25%).
But is targeting people with rock bottom credit ratings and no other housing options an ethical business model? (The article also talks about 10% a year rent increases.) I’ve personally always found these ethical questions to be difficult to take a stance on and so, for this one, I’m going to put it out to the ATC community. What do you think?