First of all, Mindy, this is very cool that you were there, and it’s even cooler that you had an opportunity to ask the questions. And it’s great that you are able to share what was said with us!
Most of everything I know about real estate investing I learned from Buffett, and I really enjoyed your article. Your article came off as quintessential Buffett in many ways, though you might be surprised to know that I read it somewhat differently from you!
‘Warren acknowledged that real estate was a factor in 2008 but said, “I don’t think we will have a repeat of that,” although he acknowledged he isn’t any better at predicting the real estate market than he is at predicting the stock market.’
Allow me to underscore the following:
“…although he acknowledged he isn’t any better at predicting the real estate market than he is at predicting the stock market.“
This is the absolute gold!
Which you followed this up with: “I don’t know, Warren. You’ve done pretty well in stocks…”
This exchange is increasingly interesting — you agree with this, Mindy. You thought it was highly interesting that Warren thinks the market, while hot, still offers good opportunities. This was reassuring to you.
I find this passage interesting for other reasons — indeed, because Warren tells us here that he is no good at predicting markets, which implies that his success has nothing to do with predicting markets. As opposed to questioning his between-the-lines messaging by saying, “I don’t know, Warren. You’ve done pretty well in stocks…” (as if that proves Buffett’s uncanny ability to predict markets), the smarter, though less intuitive, approach would be to take him on his word — he is not very good at predicting markets.
Major Premise: Buffet is highly successful.
Minor Premise: Buffett is no good at predicting markets.
Logos (Conclusion): Predicting markets had nothing to do with his success!
The natural question that follows is — if predicting the markets is not the thing which caused Buffett’s success, what did?
Consider What Warren Buffett Does
Simply put, Warren Buffett buys companies below their future intrinsic value. He is a fundamental investor and a value investor, and he seeks out opportunities to buy companies whose intrinsic value is, in his opinion, greater than the marketplace is willing to recognize.
Warren figures that a good company can’t be undervalued forever and that by buying it today at a discount to future intrinsic value, he can benefit from the delta once the marketplace finally wakes up and realizes that it had been undervaluing this company. Related:Real Estate Investment Advice From Warren Buffett
Now You Have to Ask Yourself the Following Questions
Question: What he does — does it have anything to do with the market being good or bad?
Answer: Not a thing. Yes, it is easier to find the delta when everyone is scared and running away, but ultimately you can find the delta in good markets, and in bad. The point is — buy the delta, not the asset!
Question: What does Buffett mean when he says he is “no good at predicting the market”?
Answer: He means that he doesn’t care to even try. Why? Because it doesn’t matter. He buys the delta. I bet he underwrites 5,000 companies to find one that has the right mix of components in it.
Mindy, the reason for his success is not that Warren Buffett is able to somehow play the market or see that which many others don’t see, but that he is able to find the needle in the haystack that allows him to buy future intrinsic value at today’s price, while everyone else wants to diversify their retail investments!
What Does This Have to Do With Real Estate?
In Podcast 152, Serge, Brian, and I made a big emphasis on the notion that it is absolutely crucial to buy value add — and not to be a retail investor. We made a big deal about the necessity of buying below intrinsic value.
Guys, Warren’s delta and our value add are the same thing. In both cases, we are all searching for an asset whose future intrinsic value can be bought today at a discount. And then we wait for the marketplace to catch on while we massage the asset to help the marketplace recognize that which we already see — more value!
Warren’s comments are gold in that to those who know how to listen define a buying strategy which decouples from the conditions in the marketplace. He tells us that the market is hot and cap rates are low, but he doesn’t tell us that because of this there are no opportunities.
It is up to us to take the next step and understand that value investing is a function of buying delta to the marketplace, and it doesn’t much matter what the marketplace is.
Mindy, the importance of Warren’s comments and your article is not that he thinks the market is still good and we should keep buying. The importance is that:
With a long-term horizon and professional underwriting, we shouldn’t care what the market is, and
You have to buy below intrinsic value. Forget TK or any other type of retail investing. If you’re going to do it, be a pro!
It’s between the lines, as is the case with Warren Buffett, but it is clear as day.
Investors: What is your interpretation of Buffett’s words?