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cash, that cash can either be reinvested back into the company if high return opportunities exist or the cash can be withdrawn and invested into public companies at decent rates of return.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. 

Streamline Your Mind

From successful businessmen to politicians and entrepreneurs to investors, a penchant for reading seems to be a common trait existent in many of the world's top leaders.  From President Obama to former NFL quarterback Fran Tarkenton, many start their days scouring the local and national newspapers and favorite blogs. 

"The Week" published a wonderful article in 2013 describing Warren Buffett's and Charlie Munger's reading habits.  Here's an excerpt:

Warren Buffett says, "I just sit in my office and read all day." 

What does that mean? He estimates that he spends 80 percent of his working day reading and thinking. 

"You could hardly find a partnership in which two people settle on reading more hours of the day than in ours," Charlie Munger commented. 

When asked how to get smarter, Buffett once held up stacks of paper and said he "read 500 pages like this every day. That's how knowledge builds up, like compound interest."

The article goes on to describe how possible Buffett successor, Todd Combs, has heeded his bosses advice and reads up to a thousand pages on some days! 

Confirmation Bia$

The recent attacks in Paris, I hope we can all agree, were tragic.  As the friends and relatives of the victims continue to mourn, we turn on the news every morning to updates on the search for the suspected attackers.  And, in the aftermath, social media fills up with opinions on the Syrian refugees immigrating to America in search of a better life and, more importantly, peace.  Fear abounds as to whether potential terrorists will use the opportunity to enter the country and plot further attacks on our own soil. 

Log in to Twitter or Instagram to find yourself inundated with fiery opinions and impassioned debates of commenters either siding for or against the 31 governors who have decided to not welcome Syrian refugees into their states.  58 comment responses later and nothing has been resolved.  The end result:  a lot of mud-slinging, anger-fueled rage, hot tempers, and little resolution.  What we DON'T have is a significant amount of level-headed, clear minded, well reasoned discussion.  How does this happen every time a new hot button issue arises?  How do we not improve our ability to better resolve a discussion and not take the bait some attention seeking poster hangs out there in a Facebook rant?  Why, after so many of these episodes, do we still constantly let our emotions impede our reasoning?

Well, one reason might be that social media provides a platform for this type of conversation - a back-and-forth exchange where one can take time to flesh out his argument, use a thesaurus to find a bigger, more complicated word, and dial up a Wikipedia article or two to find under-scrutinized pieces of information to back his side prior to hitting "reply".  But the root of the problem goes deeper than that.  We are pushed to partake in these disputes because of Confirmation Bias.

We Are Wimpy!

We, as a society, are wimpy.  We become more and more sensitive to every news article or Twitter post that rubs us even slightly the wrong way. We turn to social media as an outlet and believe it exists only as a means for us to vent our perspective.  If we don't like something, well, instead of doing something productive to change it, we voice our frustration in a Facebook rant.  Seven likes later - there, you feel better.  You DID do something about it.  You just changed the world, didn't you?

I'm not blaming social media for the current state of our culture; it had to be expected as the world grew more connected.  We all have a right to be heard - I'm not denying that - it's just that now we can easily access an audience for our tirades instead of chewing the ear of our significant other or neighbor or co-workers over the water cooler.  In fact, I don't even mind the obsession our society has with "being heard" and "making a point".  I think it even offers an advantage to the "doers" over the "talkers". 

Why do the "talkers" do what they do (or, don't do what they could do?)?  It starts young.  Parents these days (man, I'm sounding old!) do everything in their power to ensure that their kids are comfortable, regardless of how much they are being set up to fail.  Megan McArdle opens her book, "The Upside of Down" with a discussion on how schools are set up to let children fail later in their lives.  Parents side with their kids over teachers, grade averages are increasing - not due to smarter students, but out of convenience, multiple valedictorians are named in the same school - sometimes in the 30's and 40's - because "no one wants to make a distinction between the kids".  In general, everyone gets a trophy for participating.

Why Knowing it All Makes you Dumber . . .

A difference exists between confidence and arrogance - between being well-informed and believing you have all the answers.  Why are we so reluctant to say, "I don't know"?  Or, "I'll have to check on that"?  Instead, when pushed into a corner or pressed for more information, we succumb to a recency bias and blurt out anything we can recall on the topic at hand.  Regardless of whether the information we are spouting is correct or not - we only say it because it is the most easily accessible information our brain can provide at the moment - we feel the need to sound informed.  Or, more likely, we have a fear of being regarded as uninformed or, worse yet, unprepared. 

Volunteering the most recent information that comes to mind may get us out of a temporary pickle, but it will catch up eventually.  The problem is, once something comes out of our mouth, we own it; we tend to believe and defend it even more than before the statement was made.  The vicious cycle continues with confirmation bias, where we now begin to search only for information that supports our position, building additional mental support for a stance that we were once not really sure we even agreed with.