Musings on Buying Businesses and Real Estate

I've been an official business owner for about 2 years now and, wow!, have I learned a ton.  My plan had been to buy businesses passively and let good managers run them well.  Sometimes this seems to work and sometimes I find myself more involved than I ever imagined.  I came up with this concept of buying businesses through my never ending study of Warren Buffett and his strategies in conjunction with a little research into private equity.  I mean, those guys make a ton, so why can't I do the same, starting on a smaller scale??? 

I'm a 42.5% owner in a moving and storage business, a 50% owner in a mixed use commercial/residential property, and a 51% owner of a chocolate company in Nashville.  I still believe this is the way to wealth, along with some solid investments in public companies along the way.  My thoughts are, if these businesses can start kicking off excessive cash, that cash can either be reinvested back into the company if high return opportunities exist or the cash can be withdrawn and invested into public companies at decent rates of return.  Over time, I would imagine this strategy would work out profitably.

So here are some musings on what I've learned so far:

I'm not a big fan of real estate.  It's just a different game and seems to be a constant struggle to find good tenants.  This, in my mind, defeats the purpose of passively investing in it.  You can hire a company to manage the property, and they take 7% or more of your monthly income, which eats pretty quickly into your investment.  Over time, real estate appears to under perform the stock market anyway.  There's a game here where you can make a ton of money (just ask our POTUS!), but it's not for me.  I don't enjoy it and it lacks excitement.  And, most of all, I can imagine going into old age getting bored and tired of the same old.

I've also learned debt isn't always terrible, but it is usually bad.  We've taken out a number of loans to keep our businesses afloat, including when purchasing the businesses.  These loans handicap the businesses and the individuals involved.  I agree, not all debt is bad, but if possible to pay cash, I'd highly recommend it.  There's good debt and bad debt, as we all know, and we've taken out both.  If you can borrow money at 6% and invest it at 20%, you've got a pretty good deal on your hands.  But if things turn, you're still stuck paying this 6%, while possibly not being able to invest that money at a higher rate.  In fact, you may be put in a scenario where you're forced to take out money at 20%-30% just to stay afloat.  Good luck investing that profitably . . . but sometimes you've gotta do what you gotta do.  If you can use cash and invest at that 20%, you're in good shape. 

Also, I agree with Buffett (as usual) that good managers make the business.  We've got an outstanding manager, who holds ownership, in the chocolate company.  I've never met anyone who works as hard as she does and we simply lucked upon her.  The company would be dead in the water if we didn't have the right person in charge.  We've got a really hard worker and driven operator at the moving and storage business.  He is a straight shooter and is decisive and I like him, as well.  We knew him prior, but we still were lucky to convince him to run the operation.

On that note, I think more and more that it is important to surround yourself with people who make you better and leave less and less time for those who don't.  I find that some people are fun, but I leave hanging out with them disappointed and unfulfilled.  You don't gain anything from the time spent.  Others, you want to keep talking with all night because you can almost feel yourself growing intellectually.  You leave inspired.  I think one of the goals in life is to make more time for those people.  I'm not saying that you shouldn't hang out with the fun crowd every now and then to blow off steam, but I think you need to prioritize who you choose to spend your time with.

Those are the big generalizations at the moment.  For me, if these investments don't pan out and I have to go back to the dreaded corporate world, I'll surely be disappointed but I'll be glad I tried something different that I truly enjoy. 

Entity and Incremental Learning

From Business Insider

I've been on a bit of a psychological kick lately digging into books like "Bounce" and "Thinking Fast and Slow" - which is quickly becoming one of my favorites and, by far, one of the most informative I've ever come across.  "Bounce" mentions some of the work of Carol Dweck, who was the author of "Mindset", which contains some mind blowing information on how our minds work and how we can condition them to focus on success.

While her book was a great read, I had forgotten - or, more likely, didn't yet understand - how enlightening her concepts really were.  That was until a couple of months ago.  Not only did her writing continue to pop up in a number of books I had been reading, but my son was born.  After seeing how fast little babies pick up new habits and how quickly they learn, I began to think about the best way to raise him from a psychological standpoint to empower him to live the best life he possibly can.  I remembered Dweck and gave myself a refresher of her teachings, which took on an entirely different meaning than the first time I plowed through "Mindset". 

One of the tenets of "Mindset" was the distinction between entity and incremental learning.  Entity learning was the belief that brainpower and intelligence were innate and could not be improved.  It gave the individual a sense of entitlement.  On the opposite end of the spectrum was incremental learning:  the belief that "the novice can become the master" (quoted from "The Art of Learning").  Empowering! 

Suggestion, Anchoring, and the Adjustment Heuristic

I've recently been reading (listening on audio!) through Daniel Kahneman's "Thinking Fast and Slow" and one idea struck me that I haven't been able to get out of my head:  Anchoring and the Adjustment Heuristic.  Here is the Wikipedia definition:

Anchoring or focalism is a cognitive bias that describes the common human tendency to rely too heavily on the first piece of information offered (the "anchor") when making decisions.

Kahneman and Amos Tverskey Kahneman goes over numerous examples of this bias; one involved asking study participants if Gandhi was 144 years old when he died.  While this question is obviously absurd, as 144 years is longer than anyone can live, it sets an "anchor" from which the participants "adjust" from.  Participants adjust down from 144 to reach their answer. 

In another example, real estate agents were given sufficient information to assess the value of a house.  Within this information was the list price.  Some agents were provided information with a very high list price while others were given a very low list price.  The ones given the high list price produced a significantly higher value of the home than did those who were given the low list price. 

Like Diamonds, Cycles are Forever - Premature Thoughts on a Stock Market Crash

It is a bit early to call this past week's action a "crash" or to state that the market is in the midst of a crash, but it is also always wise to plan ahead for various possible future scenarios.  From a value investor's standpoint, crash = opportunity.  The last few years since the 2009 financial crisis, may have been a bit rough for value investors.  While the rising tide of the market over the last 6 years has inevitably raised all boats, those who focus solely on a Graham-esque value strategy may have been left in the dust as growth stocks have been the been doing the heavy lifting.

Bull runs of this nature are difficult for a value investor to stomach.  He likely invested in the 2009 crash, enjoyed the gains until he sold out at what seemed a fair valuation, and subsequently watched agitatingly while the overall market continued to appreciate.  He has likely either converted to mostly cash or focused on commodities, energy, and possibly retail stocks, which have lagged behind the rest of the market sporting low P/E's and P/B's.  Energy and commodities, specifically, have been absolutely hammered this year, while the Dow finally appears to be leveling off after the 5 year bull run.  He follows all of the rules he has picked up from Graham, Buffett, and gang, yet it appears those around him blindly throwing money at in-vogue stocks like Tesla are the ones celebrating!  He has flashbacks to 1999-2001.

But bull markets must come to an end and, like diamonds, cycles are forever.  Love him or hate him (I, for one, am not a big fan), Jim Cramer makes some valid points in "Real Money" when it comes to cycles.

Lessons of an Investing Addict Part 2: Book Value Strategies

“I’m not very good at judging people. So I found that it was much better to look at the figures rather than people. I didn’t go to many meetings unless they were relatively nearby. I like the idea of company-paid dividends, because I think it makes management a little more aware of stockholders, but we didn’t really talk about it, because we were small. I think if you were big, if you were a Fidelity, you wanted to go out and talk to management. They’d listen to you. I think it’s really easier to use numbers when you’re small.” -- Walter Schloss

In Part 1 of this series, I talked in generalities about laying the groundwork for becoming a successful investor.  I discussed some good literature to get you started down the right path and suggested familiarizing yourself with economic cycles.  Finally, you should choose whether you identify yourself as a speculator, a trader, or an investor and then to get your feet wet by putting a minimal amount of funds into a discount brokerage to get a "feel" for the market.

I have spent years researching different methods of equity investing and learned some expensive, but valuable lessons along the way.  My ego has led me to believe I could trade stocks and beat the market; convincing me that somehow I had the gift to outdo the money managers who live and breath this stuff all day, every day.  I have since moved on from the guessing game and built an investment strategy around the techniques of Graham, Buffett, and my favorite, Walter Schloss. 

If you have any doubts about the effectiveness of a long-term value-investing approach, I highly encourage you to read "The Superinvestors of Graham-and-Doddsville", a speech by Buffett to a class at Columbia.  Buffett does a fantastic job articulating the school of thought that these "Superinvestors" adhere to while dispelling the argument that randomness is solely responsible for an investor's success.