INVEST LIKE BUFFETT TO EAT THR BUFFET.
Few events have a profound effect on the world, for better or for worse. Be it the discovery of the Americas or the day the selfie was discovered. Humanity is about to witness one such event at the end of this year.
The Oracle of Omaha Warren Buffett, known for his prudent intellect in the art of investing or as he likes to call it, watching paint dry is retiring. The man who the Bank of America gives a holler if they are ever God forbid not liquid is going bid adieu to the world of Investing at the end of this year after a storied career of almost a century.
At this turn of events, one may wonder what lessons can be gleaned from the legend in their own investing journey. Particularly in the field of real estate investments. To see what he would do we need to look at Benjamin Graham the mentor to the Oracle. Namely, his eponymous book The Intelligent Investor
Here are some ideas we got after reading the book back to back quite a few times.
1. The cigarette butt strategy
Cigar butt investing is a term coined by Buffett. In a letter to Berkshire Hathaway’s shareholders back in 1989, he explained the theory as a way of capturing fast value from weak companies. Per his letter:
“If you buy a stock at a sufficiently low price, there will usually be some hiccup in the fortunes of the business that gives you a chance to unload at a decent profit, even though the long-term performance of the business may be terrible. I call this the ‘cigar butt’ approach to investing. A cigar butt found on the street that has only one puff left in it may not offer much of a smoke, but the ‘bargain purchase’ will make that puff all profit.”
In the world of Real Estate investing it is also known as a distress deal. It is a foolproof way of ensuring returns but in a not so stellar market. Just like how Buffett learned in the post-war American economic boom. Any asset well below the market rates in an economy on steroids has some intrinsic weaknesses.
In 1962, Warren Buffett began buying Berkshire Hathaway stock for his investment fund, Buffett Partnership Ltd., at $7.50 per share, anticipating that as the company liquidated textile mills there would come a tender offer when he could sell the shares at a profit. A few weeks later, Warren Buffett received the tender offer in writing, but the tender offer was far lower. This left Buffett’s fund with a major interest in a declining textile business. Buffett has described purchasing the Berkshire Hathaway textile company as the biggest investment mistake he had ever made, denying him compounded investment returns of about $200 billion over the subsequent 45 years. He has estimated that had he invested the same money directly in insurance businesses instead of indirectly via Berkshire Hathaway (due to what he perceived as a slight by an individual), it would have paid off several hundredfold.
In the red-hot market situation of the Dubai property market this is very much possible.
2. Cashflow investing
This is a term borrowed from Graham’s book and seen first hand with Buffett investing in numerous insurance firms over the century. From Geico to Chubb, Buffett has shown a preference for insurance firms due to its low operational costs and high functioning cash flow. Even his 9% stake in Coca Cola is a play with the same philosophy at heart.
In the real estate world, one can emulate the legend by acquiring high rental properties or even the sub-leasing route. The challenge as always remains in keeping the cash flow steady and continuous. Short term rentals can go vacant. A property may lose its sheen as the relentless march of time takes a toll on it. A property may need repairs far more than usual due to negligent users and care-takers.
This is where a property management firm comes handy. Since you have read till here it is assumed that we are talking about a certain volume of properties and not just a single unit. As this may cause real profits to nosedive after factoring all the costs using this method.
Another new age method which may help potential investors to maintain a steady cash flow is by the use of Real estate investment trusts (REIT). For a fraction of the wealth needed to enter into the real estate market a potential investor and bank on a steady flow of income from the REIT. Certainly, a route one should consider in any field not just the property sector.
In related Mr Buffett has acquired huge tracts of farmland for this very same purpose.
3. Value Investing
This is the method that made Buffett the legend he is. After a discussion with his longtime friend and soon to be right hand man Charlie Munger, Buffett decided on a new strategy to amass millions.
Buying great companies at fair prices rather than fair companies at great prices became the mantra. With the Berkshire debacle fresh in his memory Buffett combined all that he had learned and devised new methods. This third wave witnessed Buffett corner shares of Apple, General Electric and Coca Cola.
All had one thing in common – An unmistakable and irreplaceable brand value. A Competitive moat that no rival could hope to emulate.
In the real estate world, this can be seen in branded offerings. A relevant branded offering with widespread market appeal is going to beat any other offering blindfolded.
So here it is my dear friends and readers, the mantras of the Oracle of Omaha applied into a field that he perhaps never though of.
: Austin Thomas
