Why Buffett dislikes Real Estate Investing
Well, in respect to real estate, it’s so much harder than stocks in terms of negotiation of deals, time spent, and the involvement of multiple parties in the ownership. Usually when real estate gets in trouble, you find out you’re dealing with more than just the equity holder.
There have been times when large amounts of real estate have changed hands at bargain prices, but usually stocks were cheaper and they were a lot easier to do. Charlie did more real estate. Charlie enjoyed real estate transactions, and he actually did a fair number of them in the last 5 years of his life. But he was playing a game that was interesting to him.
I think if you’d asked him to make a choice when he was 21 – either be in stocks exclusively for the rest of his life or real estate for the rest of his life – he would have chosen stocks. There’s just so much more opportunity, at least in the United States, that presents itself in the security market than in real estate.
In real estate, you’re usually dealing with a single owner or a family that owns a large property they’ve had a long time. Maybe they’ve borrowed too much money against it. Maybe the population trends are against them. But to them, it’s an enormous decision.
When you walk down to the New York Stock Exchange, you can do billions of dollars worth of business, totally anonymous, and you can do it in 5 minutes. The trades are complete when they’re complete. In real estate, when you make a deal with a distressed lender, when you sign the deal, that’s just the beginning. Then people start negotiating more things, and it’s a whole different game with a different type of person who enjoys the game.
We did a few real estate deals that came our way in 2008 and 2009, but the amount of time they would take compared to doing something intelligent and probably better in securities –there was just no comparison. In a real estate deal, every sentence is important to the person. In stocks, if somebody needs to sell 20,000 shares of Berkshire and they call us and the price is right, it’s done in 5 seconds and it closes right away.
The completion rate for working on anything in stocks, assuming you’ve got a meeting of the minds on price, is essentially 100%. In real estate, the negotiation just begins when you agree on deals, and then they take forever. For a 94-year-old, it’s not the most interesting thing to get involved in something where the negotiations could take years.
Real estate transactions have parties on both sides that aren’t ready to act. We find it much better when people are ready to pick up the phone and you can do hundreds of millions of dollars worth of business in a day.
On the importance of being patient when investing but also acting quickly
There are times when you have to act fast. In fact, we’ve made a great deal of money because we’re willing to act faster than anybody around.
The trick when you get in business with somebody who wants to sell you something for $6 million that’s got $2 million of cash, a couple million of real estate, and is making $2 million a year, is you don’t want to be patient at that moment. You want to be patient in waiting to get the occasional call. My phone will ring sometime with something that wakes me up. You just never know when it’ll happen.
That’s what makes it fun. So patience is a combination of patience and a willingness to do something that afternoon if it comes to you. You don’t want to be patient about acting on deals that make sense, and you don’t want to be very patient with people talking to you about things that will never happen.
The main thing is you have to be willing to hang up after 5 seconds and you have to be willing to say yes after 5 seconds. You can’t be filled with self-doubt in this business.
One of the great pleasures – it is the great pleasure actually in this business – is havingpeople trust you. That’s really why I work at 94 when I’ve got more money than anybodycould count. It means nothing in terms of how I’m going to live or how my children are goingto live or anything else.
Our financial condition continues to hold a lot more in cash and treasuries than I would like, but that’s simply a question of when opportunities occur. If you get real opportunities every five or six years, you have to be patient.
Charlie always pointed out that we made most of our money out of about eight or nine ideas over 50 years. We talked about it every day and read every report and did everything else. But if you think you can get an idea a day from listening to your broker or reading financial information, forget it. Every now and then you get extraordinary opportunities, and most of the time you don’t have much of an edge.
About investing in foreign currency
Well, we always have – the Japanese situation is different because we
intend to stay so long with that position and the funding situation is so cheap that we’ve attempted to some degree to match purchases against yen-denominated funding. But that’s not a policy of ours. In fact, that’s the first time we’ve done that. We’ve owned lots of securities in foreign currencies.
We do nothing in terms of its impact on quarterly and annual earnings. We don’t do anything based on its impact on quarterly and annual earnings. There’s never been a board meeting I can remember where I’ve said, “If we do this, our annual earnings will be this, therefore we ought to do it.” The number will turn out to be what it’ll be. What counts is where we are five or 10 or 20 years from now.
If you start focusing on what number you’re going to produce, you will quickly get tempted to play around with the numbers and sometimes seriously play around with the numbers. I’ve seen people I trust in all kinds of other ways, but they regard playing around with numbers as perfectly okay. That’s just not something we do – we just don’t think about that.
So currency value is a scary thing, and we don’t have any great system for beating that. We do in this particular Japanese position because we expect to hold it for 50 or 100 years or more, and we’ll be owning something denominated in yen and easily predictable. As long as the carry on it is right, we’ll attempt to issue Japanese-denominated liabilities, but that’s not because of anything we care about in terms of quarterly or annual earnings.
Charlie always felt that if he had to pick an area outside of stocks in which to invest – and he knew a lot about bonds, real estate, and other things – he thought he could make a lot of money in foreign currency. But we’ve done it once. It’s not inconceivable we would do it again, but it’s unlikely.
There could be things happen in the United States that would make us want to own a lot of other currencies. I suppose if we made some very large investment in a European country, there might be a situation where we would do a lot of financing in their currency. But it’s not a regular activity. It was something that was obvious to do in theJapanese situation where we had the ability to borrow at a very low carrying cost, and we felt very good about the income we’d be receiving from these securities.
On copying the Berkshire Hathaway model
I think there are people that want to copy Berkshire’s model, but usually
they don’t want to copy it by also copying the model of the CEO having all of his money in the company forever. They have a different equation – they’re interested in something else. That’s capitalism, but they have a whole different situation and probably a somewhat different fiduciary feeling about what they’re doing.
Sometimes it works and sometimes it doesn’t work. If it doesn’t work, they go on to other things. If what we do at Berkshire doesn’t work, I spend the end of my life regretting what I’ve created. So it’s just a whole different personal equation.
There is no property casualty company that can basically replicate Berkshire. That wasn’t the case at the start – at the start we just had National Indemnity a few miles from here, and anybody could have duplicated what we had. But that was before Ajit came with us in 1986, and at that point the other fellows should have given up.
Advice for young investors
Who you associate with is just enormously important. Don’t expect that you’ll make every decision right on that, but you are going to have your life progress in the general direction of the people that you work with, that you admire, that become your friends.
I mentioned a few fellows that have died in the last couple years. All of those people were people that, if we were working together on something one-ten-thousandth the size of Berkshire, they’d be the kind of people you’d choose. They’re people that make you want to be better than you are. You want to hang out with people that are better than you are and that you feel are better than you are because you’re going to go in the direction of the people you associate with.
That’s something you learn later in life – it’s hard to really appreciate how important some of those factors are until you get much older. But when you’ve got people around you like Tom Murphy and Sandy Gottesman and Walter Scott, you’re just going to live a better life than if you just go out and look at somebody that’s making a lot of money and decide you’re going to try and copy them.
I would try to be associated with smart people too where I could learn a lot from them, and I would try to look for something that I would do if I didn’t need the money. What you’re really looking for in life is something where you’ve got a job that you’d hold if you didn’t need the money, and I’ve had that for a very long time.
All the fellows I named had it, and they also always did more than their share and never sought more than their share of the credit. They behaved the way you’d like anybody you work with to behave. When you find them, you treasure them, and when you don’t find them, you still keep doing whatever enables you to eat. But you don’t give up on looking around, and you will find people who do wonderful things for you.
The best manager I ever knew – and there’s a lot of contention for who that would be – butactually was Tom Murphy Sr., who lived to almost 98. I’ve never seen anybody who could getthe potential out of other people more than Murph. If you wanted to become a better person, you’d want to work for Tom Murphy. There are all kinds of successful people that don’t bringthat to the party. I’m not saying that’s the only way to succeed, but I think it’s the mostpleasant way to succeed for sure.
On the importance of the balance sheet
I spend more time looking at balance sheets than I do income statements. Wall Street doesn't pay much attention to balance sheets, but I like to look at balance sheets over an 8 or 10 year period before I even look at the income account because there are certain things it's difficult to hide or play games with on the balance sheet than with the income statement.
Neither one gives you the total answer on anything, but you should understand what the figures are saying and what they don't say and what they can't say and what the management would like them to say that the auditors wouldn't like them to say. You learn more from balance sheets in my view than most people give them credit for.
On why to invest when there is pessimism
We will make our best deals when people are the most pessimistic.
Over my lifetime I’ve had fabulous opportunities sometimes, and they happen because humans are human. I don’t get fearful by things that other people are afraid of in a financial way. The idea that if Berkshire went down 50% next week – I would regard that as a fantastic opportunity and it wouldn’t bother me in the least. Most people react differently.
It’s not that I don’t have emotions, but I don’t have emotions about the prices of stocks. Those decisions get all the way to my brain, whereas emotions can get bogged down some other place.
On the importance of teachers
The teachers you get in your life have this incredible impression on you, and a lot of them are the formal teachers you have, but some are informal teachers too. I’ve learned from certain employers so much. You really hope you're learning from everyone you find who's well-intentioned and has had a lot of experience. I had a lot of good luck in that.
I would say that where I was really lucky was my dad was in the investment business. So I would go down on Saturday and I'd wait for him to go to lunch, and I'd read the books that were around there that nobody else ever read. Numbers talk to me, and I could never get my fill of them.
Then I discovered the public library and I read every book there was on investments, literally, in the Omaha public library. I enjoyed learning about that. Unlike Charlie – if Charlie was reading about electricity, he would want to have known everything that Thomas Edison knew and more, and go through the same thought processes and understand how everything worked. I didn't care how it worked. I just cared whether it worked. That's a limitation – I'm confessing here, I'm not bragging.
As Charlie would say, people would always ask, “If you could only have lunch with one person living or dead, who would it be?” And Charlie said, “I’ve already had lunch with all of them because I’ve read all their books.”
I was lucky to find something that fit me very early on. If my ambition had been to become aventriloquist or whatever it might have been, it wouldn't have worked. I just spent hours and hours and hours on investing.
People that teach, in general, love having a young student who's actually really interested in the subject, and they'll spend extra time with you. I ran into that. I had Graham and Dodd at Columbia. Dave Dodd treated me like a son basically. But I was interested in what they were saying and they found it kind of entertaining that I was so interested, so I would look around at what really fascinates you. I wouldn't try and be someone else.
Miscellaneous
I look at the financial statements of about 50 or 60 of our companies every month.
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You get a few breaks in life in terms of people you meet who just change your life dramatically. If you’ve had a handful of those, you treasure them. We’ve had them on this board of Berkshire – Tom Murphy, Sandy Gottesman, Walter Scott, Bill Scott – we’ve made lifelong assets out of people that are the right sort, with incredible talent, who are lots of fun to work with, always doing more than their share.
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You really want to work at something you enjoy. I’ve had five bosses in life and I liked every one of them – they were all interesting. I still decided that I’d rather work for myself than anybody else. But if you find people that are wonderful to work with, that’s the place to go. I’ve told my kids basically that you don’t get lucky like I did when I found what interested me at seven or eight years of age. It could have taken a lot longer, but you want to find what you love.
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If very stupid things are happening around you, you do not want to participate. If people are making more money because they’re borrowing money or participating in securities that are pieces of junk but they hope to find a bigger sucker later on, you have to forget that.
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The world is not going to adapt to you. You’re going to have to adapt to the world.
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The world makes big mistakes, and surprises happen in dramatic ways. The more sophisticated the system gets, the more the surprises can come out of left field.
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That’s part of the stock market, and that’s what makes it a good place to focus your efforts if you’ve got the proper temperament for it and a terrible place to get involved if you get frightened by markets that decline and get excited when stock markets go up. I don’t mean to sound particularly critical – I know people have emotions, but you’ve got to check them at the door when you invest.
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Charlie was probably the best person you could imagine in what he learned. Charlie was never satisfied with just superficial things about any subject. He really wanted to understand it and he always would tell me that you shouldn’t take a position on anything until you can describe the arguments against it better than the person who is arguing with you – that you should be able to argue their case better than they can. He was a remarkable teacher.
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If we want to do it with our own money, we can do it, but we’re not going to do things with your money that we think are stupid. You ought to get rid of us if we do. It’s easier to do stupid things with other people’s money than it is with your own.
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Greg Abel on Buffett
Warren is obviously a remarkable teacher and I benefit from that every day and for many years. I’m fortunate that if I had to be remembered as something right now, I’d want to be remembered as a great father, but equally a coach. And that goes to family, friends, and just being involved with the kids I coach in hockey or baseball or whatever it may be. I think we’ve got a great opportunity to give back to them at a very young age.
I love thinking of Warren truly as a teacher and I get the opportunity to continue to learn every day. Warren and I have strong dialogue every week and we’re always talking around opportunities in Berkshire or things that are going on globally or in the US, and each one’s truly a learning moment.
Greg's perspectives on capital allocation at Berkshire Hathaway
We will remain Berkshire and will never be dependent on a bank or some other party forBerkshire to be successful. With allocation of capital comes management of risk andunderstanding risk. That falls upon all our managers, insurance and non-insurance, but we’llbring that across Berkshire.
The other value I would touch on relates to where I’m going: ultimately we have a great set ofoperating companies that produce significant cash flows, be it in the insurance companiescreating float or our various non-insurance companies producing significant cash flows on anannual basis. We intend to continue to ensure that’s a strength of Berkshire going forward.
With those cash flows and with the float, and with significant resources already on ourbalance sheet, we’ll continue to move forward with a very similar philosophy. It’s an identicalphilosophy to what we’ve had currently and for the past 60 years.
We’ll start by looking at opportunities within our business – are our insurance and non-insurance businesses properly capitalized and do they have the opportunity to manage theirbusiness? They’ll operate in an autonomous way, but Berkshire still manages the capital thatwill go into those businesses or what potentially will come out of them.
The next opportunity is to acquire businesses in their totality, 100%. There are great timeswhen we can do that. Warren touched on the $10 billion acquisition in the last quarter. Butthe value relative to the risk have to be right. If it’s right, we want to own it. If it’s not the time,there’ll be another time to own assets like that.
Then there’s the opportunity to own pieces of companies through equity. But as Warren’salways highlighted, though we own a piece of a company, we own a piece of that cash flow,a piece of their balance sheet. It’s not just a share certificate. We’ll approach it with thethought that we’re going to own this company for the long term.
We need to thoroughly understand what the economic prospects of those companies willlook like – as Warren said earlier – 5 years from now, 10 years from now, 20 years from now.If we don’t have a view of that, we won’t be investing, be it 100% or 2% of a companythrough equities. We have to thoroughly understand what those prospects look like and theunderlying risks of the businesses. It’s really the investment philosophy and how Warren andthe team have allocated capital for the past 60 years. It will not change, and it’s the approachwe’ll take going forward.
Thank you for writing such a great takeaway.
Well captured. Thank you