Tag: shareholder letter

• A sensible purchase price

  “Investing is an activity in which consumption today is foregone in an attempt to allow greater consumption at a later date. “Risk” is the possibility that this objective won’t be attained.” -Warren Buffet

  Warren Buffet published his annual letter to Berkshire Hathaway shareholders this past Saturday. I always enjoy reading his letters and I have been doing it for years. If only he wrote a daily blog.

  One of the things he talks about in this year’s letter is why Berkshire wasn’t very acquisitive in 2017:

  In our search for new stand-alone businesses, the key qualities we seek are durable competitive strengths; able and high-grade management; good returns on the net tangible assets required to operate the business; opportunities for internal growth at attractive returns; and, finally, a sensible purchase price.

  That last requirement proved a barrier to virtually all deals we reviewed in 2017, as prices for decent, but far from spectacular, businesses hit an all-time high. Indeed, price seemed almost irrelevant to an army of optimistic purchasers.

  Some of you in the real estate game might be feeling similarly. But he ends the section with these words of advice: 

  In the meantime, we will stick with our simple guideline: The less the prudence with which others conduct their affairs, the greater the prudence with which we must conduct our own.

  Buffet has a way of simplifying things. He also, clearly, has a way of remaining disciplined.

  2018.02.27

• Warren’s blog

  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?

  2016.03.02

• What I see as the fundamentals of real estate investing

  Earlier this week my father sent me this article containing an excerpt of Warren Buffet’s upcoming shareholder letter. His annual letter—which started in 1965—is well known in the investment community. And in many ways, it’s like his own annual blog, started well before anybody knew what a blog was. His letters are personal, genuine and engaging—just like a good blog should be.

  But for me, what was really interesting about the letter is that it provided a number of lessons about investing in real estate. Lessons which, in my view, really represent the fundamentals of the business. The way I think about it is that there are really 2 ways in which to make money as a real estate investor over the long term. You can develop/reposition real estate and/or you can collect rent.

  Develop/Reposition

  If you’re developing or repositioning real estate, it means you’re doing something to increase the value of the property. It could be by rezoning, building new, or through an aggressive leasing strategy. It’s whatever you believe will unlock additional value. Once you’ve done this, you then either sell the property or you move onto the 2nd way of making money in real estate.

  Collect Rent

  By collecting rent, I really mean that you’re buying yield. This means you’re saying to yourself:

  I can buy this property for $1,000,000 and the net operating income on it is $100,000 (per year). So that means I’m buying at a 10% cap rate (or return). 

  Or maybe you’re saying:

  I can buy this property for $1,000,000, but the net operating income is only $25,000. However, the rents are well below market and I think I can easily get this thing up to a “10 cap.”

  Either way, you’re buying a stream of cash flows and you have an understanding of where that cash is going to come from.

  Speculate

  If on the other hand, you’re buying solely on the expectation that prices are destined to rise, you are—as Buffet points out in his letter—speculating. You’re not doing anything to create value and so you’re not developing. And if you’re counting on price growth to generate your investment returns, then you aren’t buying yield either.

  While many people have made large sums of money by speculating on real estate, I don’t consider myself capable of doing that in any sort of sustainable way. Hell, if Warren Buffet doesn’t think he can do that, why should I think I’m special.

  But some of you may disagree with this framework. If so, I’d love to hear from you in the comment section at the bottom of this post.

  2014.02.26