Buffett, Woodstock and Investing in property

With the sweat once again mopped from the brows of thousands of investors around the world with the release of Berkshire Hathaway’s annual letter to shareholders, the prelude to the annual shareholders meeting – curiously dubbed ‘Woodstock for capitalists’ and with the housing market in Australia going through a sustained period of growth I thought it would be opportune to share some of Warren Buffett’s insights that he has learnt about investing in property.

Firstly, to reflect on his core investment philosophy

Legend has it that Charlie Munger most influenced Warren Buffett’s investment philosophy – going from selecting stocks in middling companies at bargain prices to selecting stocks in great companies at fair prices – best summed up by Buffett himself when he said, “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price”.

The strength of the companies Buffett selects lies in the long-term consistency of the company’s growth rates and in their ability to generate cash and produce income.  At risk of over simplification, the investment principals he applies in selecting these companies, can be construed as;

• Target industries with long term demonstrated performance, a sustainable competitive advantage and cash generating abilities.

• Ignore “flavour of the month” stocks driven by emotion, industry noise and hyperbole.

• Invest in “strong brand” companies with favourable long-term growth and upside potential.

• Buffett articulated that “Price is what you pay; value is what you get”, and he aims to buy these companies when the prices are below their intrinsic value. Timing plays a role in this however he consistently finds these low-priced value companies by analysing the company’s core fundamentals and the potential for them to have long term favourable economics.

• Be in it for the long haul and play a long game.

Now to property investment

It was the February 24th 2014 Berkshire Hathaway letter to shareholders that Buffett looked back on 2 real estate purchases he made in 1986 and 1993. One was a 400-acre farm, the other a retail property near New York University.

His approach to purchasing these properties can be summed up by his comment, “What the economy, interest rates, or the stock market might do in the years immediately following — 1987 and 1994 — was of no importance to me in determining the success of those investments. I can’t remember what the headlines or pundits were saying at the time. Whatever the chatter, corn would keep growing in Nebraska and students would flock to NYU”.

The core insights he offered up in the letter on his fundamentals for real estate investing were that;

• You don’t need to be an expert in order to achieve satisfactory investment returns. But if you aren’t, you must recognize your limitations and follow a course certain to work reasonably well. Keep things simple and don’t swing for the fences. When promised quick profits, respond with a quick “no.”

• Focus on the future productivity of the asset you are considering. If you don’t feel comfortable making a rough estimate of the asset’s future earnings, just forget it and move on. No one has the ability to evaluate every investment possibility. But omniscience isn’t necessary; you only need to understand the actions you undertake.

• If you instead focus on the prospective price change of a contemplated purchase, you are speculating. There is nothing improper about that. I know, however, that I am unable to speculate successfully, and I am skeptical of those who claim sustained success at doing so. Half of all coin-flippers will win their first toss; none of those winners has an expectation of profit if he continues to play the game. And the fact that a given asset has appreciated in the recent past is never a reason to buy it.

• With my two small investments, I thought only of what the properties would produce and cared not at all about their daily valuations. Games are won by players who focus on the playing field — not by those whose eyes are glued to the scoreboard. If you can enjoy Saturdays and Sundays without looking at stock prices, give it a try on weekdays.

• Forming macro opinions or listening to the macro or market predictions of others is a waste of time. Indeed, it is dangerous because it may blur your vision of the facts that are truly important. (When I hear TV commentators glibly opine on what the market will do next, I am reminded of Mickey Mantle’s scathing comment: “You don’t know how easy this game is until you get into that broadcasting booth.”)

Summary

We can all take what we want from these reflections from Buffett.

However, I think we can all agree that these are fundamentals that you don’t need to be a billionaire to understand or apply and that some stead must be put into the musings of a man whose net wealth is reportedly over 76 billion USD.

If you need support and advice in buying a property, Equilibria Finance can guide you through this process.

Anthony Landahl | Equilibria Finance

Note: This is for general information purposes only and does not constitute advice. With all of these options there are a number of considerations outside the scope of what is covered in this article. Please ensure your personal circumstances are taken into consideration.