- RSS Channel Showcase 8170760
- RSS Channel Showcase 9173596
- RSS Channel Showcase 6744563
- RSS Channel Showcase 1068354
Articles on this Page
- 06/26/17--10:50: _We ate at Warren Bu...
- 06/27/17--08:12: _Warren Buffett's ne...
- 06/28/17--05:49: _WARREN BUFFETT: The...
- 06/28/17--06:17: _These are the watch...
- 06/30/17--03:44: _Warren Buffett's Be...
- 06/30/17--05:20: _Warren Buffett is n...
- 06/30/17--08:40: _Warren Buffett is s...
- 06/30/17--11:18: _Henry Blodget on ho...
- 07/06/17--07:58: _Here are 8 companie...
- 07/07/17--11:34: _Hedge fund billiona...
- 07/09/17--04:01: _6 life lessons from...
- 07/10/17--11:01: _We ate at Warren Bu...
- 07/10/17--14:27: _Bill Gates, Warren ...
- 07/12/17--13:05: _Here are the millio...
- 07/14/17--11:22: _Sprint has reported...
- 07/14/17--11:31: _Sprint pops after s...
- 07/17/17--07:59: _Here's how to use o...
- 07/17/17--15:01: _Here's what Warren ...
- 06/30/17--08:40: Warren Buffett is set to make $12 billion on a single trade (BAC)
- 06/30/17--11:18: Henry Blodget on how to avoid getting "Amazoned"
- Companies with pre-tax earnings of at least $500 million, more than the $75 million mark that would qualify as a "large" purchase for Buffett. That left Adams companies that are worth anywhere from $33 billion to $133 billion.
- Buffett wanted "demonstrated consistent earning power" and no turnaround situations. Adams picked companies that have maintained an average price-to-earnings ratio of at least 15x for each of the last three years.
- For companies earning good returns on equity while using little or no debt, Adams screened for at least 8% return on equity and a maximum debt-to-equity ratio of 33%.
- Buffett doesn't want Berkshire to supply the target company's management. The list below only includes companies where the average tenure of management is at least five years.
- To satisfy the requirement that it's a "simple business," none of the companies Adams picked have more than five subindustries.
- 07/09/17--04:01: 6 life lessons from Warren Buffett
- 07/14/17--11:31: Sprint pops after seeking investment from Warren Buffett (S)
- Pricing power
- Barriers to entry
- Switching costs
- Low-cost advantages
- Trade secrets
- Increasing demand– This usually occurs with an increase in population and high-paying jobs in your general area. Within micro-locations, you can also find other demand factors like proximity to parks, greenways, schools, and coffee shops.
- Barriers to supply– This occurs from physical restraints (i.e. no more new land to develop) and government restraints (restrictive or expensive development laws). The result is new construction becomes much more expensive and rare, and this also makes existing housing more valuable.
- Marketing sources to find deals– Finding good deals is often the most difficult part of real estate investing. But if you can find and cultivate little known or difficult deal sources, you can carve out a strong competitive advantage for yourself.
- Processes & systems – Real estate investing has long been a local and informal business. If you can bring a degree of professionalism and systems to your small business, you will create a competitive advantage. The Emyth was a book that helped me immensely in this area.
- Relationships/network– Relationships with people always matter, but with local real estate investments, it matters even more. When you build strong relationships with vendors and other team members, you build an economic moat for yourself. The Speed of Trust by Stephen M.R. Covey opened my eyes to the practical economic value of strong relationships.
- Customer service– While the real estate itself is typically the focus, how you treat your customers can set you apart from your competition. Be creative and find ways to be remarkable with your service. Seth Godin's great book Purple Cow can give you inspiration in this department.
- Property hacks– You can use your creativity and knowledge to improve your profits with real estate investing. For example, you may decide to install tile or other hard surface floors in your rental. It may cost you 20% more now, but it saves you MANY times the cost over the next ten years of ownership. There are many other property hacks like this that give you an advantage.
- 07/17/17--15:01: Here's what Warren Buffett looks for in a fund manager
Gorat's Steakhouse is known to be a favorite restaurant of Warren Buffett. We visited the Omaha, Nebraska restaurant to try Buffett's usual meal and take a look at his private dining area.
Warren Buffett made a big investment in Store Capital Monday, which led to a downgrade from a Wall Street investment bank.
Mizuho downgraded Store Capital from buy to neutral after the company announced that Warren Buffett had invested $377 million in the company. After the announcement, shares soared about 11% to end Monday trading at $23.11.
The ballooning stock price was the main reason for Mizuho's downgrade.
"We think Berkshire's investment validates STOR's business model and alleviates concerns over n/t funding needs," Mizuho's Haendel St. Juste wrote. "However, after today's +11% move, we think STOR is fairly valued and are downgrading the stock to Neutral."
Mizuho thinks the company's business model is solid. Store Capital invests in single-tenant real estate and receives "above average" yields on those investments, according to St. Juste.
Store Capital shares were down about 16.5% in 2017 before the Buffett investment. After Monday's big run up, shares are still down 8.2% for the year.
St. Juste believes that Buffett's investment will "provide a floor for the stock near-term."
Shares of Store Capital are trading down 1.86% at $22.68 on Tuesday.
Warren Buffett thinks the Republican healthcare bill has one goal: to help rich people like him.
During an interview with "PBS NewsHour" on Tuesday, the legendary investor presented his tax return from last year to show just how much he would save from the two proposed Republican plans (the House's American Health Care Act and the Senate's Better Care Reconciliation Act).
"Well, I brought my tax return along for the last year," Buffett told PBS' Judy Woodruff. "I filed this on April 15. And if the Republican — well, if the bill that passed the House with 217 votes had been in effect this year, I would have saved — I can give you the exact figure. I would have saved $679,999, or over 17% of my tax bill."
Both the House and Senate GOP bills repeal all of the taxes created by the Affordable Care Act, or Obamacare, which primarily fall on the wealthiest Americans. According to a study by the Tax Policy Center, the top 1% of earners in the US would see an average tax-bill decrease of $37,240 under the proposed healthcare bills. People in the top fifth of earners would get 64.2% of the benefit from the tax cut.
"There's nothing ambiguous about that," Buffett said. "I will be given a 17% tax cut. And the people it's directed at are couples with $250,000 or more of income. You could entitle this, you know, Relief for the Rich Act or something, because it — I have got friends where it would have saved them as much as — it gets into the $10-million-and-up figure."
Buffett also criticized Republicans for voting for a bill that would bring down their own taxes, saying most members of Congress make more than $250,000 a year.
"They have given themselves a big, big tax cut, if they — if they voted for this," the Berkshire Hathaway CEO said.
Buffett also reiterated his call for a single-payer system for healthcare, which he said would be "more effective."
You can watch the exchange below:
Since it was invented over 200 years ago, the wristwatch has been an integral component of men's fashion.
In addition to their practical functionality of telling time, a watch serves as a collectible piece of art that communicates the personality and style of its wearer.
With the help of Crown and Caliber, an Atlanta-based preowned-luxury watch marketplace, we've put together a list and commentary about the wristwatches worn by some of the most powerful men in the financial services industry.
(Reuters) - Warren Buffett's Berkshire Hathaway Inc said it would exercise its warrants to buy 700 million common shares of Bank of America Corp, making it the largest shareholder of the lender.
Berkshire said it would exercise its warrants after the bank raises its quarterly dividend to 12 cents per common share.
The conglomerate said it expected to use $5 billion of Bank of America's 6 percent preferred stock that it currently owns to fund the acquisition.
Buffett had bought $5 billion of Bank of America preferred stock with a 6 percent dividend, or $300 million annually, in August 2011, when investors worried about the bank's capital needs.
The purchase included warrants to acquire 700 million common shares at $7.14 each, less than one-third Thursday's closing price of $24.32.
Bank of America on Wednesday boosted its annual dividend to 48 cents per share from 30 cents, beginning in the third quarter.
The dividend increase was approved by the Federal Reserve, which conducts annual "stress tests" of big banks' ability to handle tough economic and market conditions.
The second-largest U.S. bank also announced a $12 billion stock buyback plan.
Vanguard Group, which is currently BofA's biggest shareholder, holds 6.6 percent stake, or about 652 million shares in the company. (Reporting By Aparajita Saxena in Bengaluru; Editing by Anil D'Silva)
Warren Buffett's Berkshire Hathaway is now the biggest owner of two of the world's largest banks: Bank of America and Wells Fargo.
On Wednesday, the Federal Reserve cleared the way for Buffett to become Bank of America's largest shareholder.
It passed all the big banks on their so-called stress tests, giving them permission to use their capital for things beyond buffering against disaster, including share buybacks and dividend payments.
Bank of America raised its dividend to $0.12 a common share.
That made it compelling for Berkshire to convert its preferred shares into common stock, giving it shareholder ownership, and earning as much as $12 billion in profit. Berkshire announced on Friday that it would exercise its warrants to buy 700 million common shares of Bank of America, the third-largest US bank by market cap, instead of waiting until just before their expiry in 2021.
In a statement, the bank said it welcomed Buffett's decision.
With $2.19 trillion in assets, Bank of America ranked ninth in the world, according to an S&P Global Market Intelligence ranking released in April.
Buffett's initial investment in the bank dating back to 2011 was a thumbs-up of sorts to CEO Brian Moynihan, who had recently taken the helm. It was also a bet that the bank would recover from the fallout of toxic mortgage securities.
He acquired $5 billion of Bank of America preferred stock with a 6% dividend, or $300 million annually, in August 2011, at a time when investors worried about the bank's capital needs, Reuters reported.
The conglomerate said last July that it owned more than 10% of Wells Fargo, which on Friday amounted to nearly 537 million shares, according to Bloomberg. It's the second-largest bank in the US by market capitalization and was the 10th largest in the world by assets, according to S&P.
Warren Buffett is all set to pull in $12 billion in profits on a single deal with Bank of America.
Buffett invested $5 billion in Bank of America in 2011. That move came at a critical time for Bank of America with the company trying to leave behind the financial crisis with its new CEO Brian Moynihan.
Buffett negotiated a favorable deal with the bank, due to his investment acting as a public vote of confidence in the company's future. His $5 billion investment in preferred shares came with the option to convert those to common stock shares until 2021. The preferred shares paid $300 million annually in dividends.
Buffett's common stock shares are currently worth about $17 billion, $12 billion more than the purchase price.
After passing a stress test on Wednesday, Bank of America's plan to pass along its wealth to its shareholders in the form of dividends and stock buybacks was approved. The company increased its dividend payments to 12 cents a share, which will return $336 million a year to Buffett after converting his shares to common stock, according to data from Bloomberg.
The move makes Buffett the largest shareholder in two of the world's largest banks, Bank of America and Wells Fargo.
Bank of America is up 7.93% this year and currently trades at $24.36. Buffett bought his shares for around $7.14 in 2011.
Warren Buffett invested $377 million in the REIT Store Capital which caused the stock to rise 11% on the news. This REIT has a portfolio of leases that are primarily held by services companies that require human interaction. These types of businesses are generally pretty Amazon-proof, which makes it an interesting play.
This works into a larger theme we have seen on Wall Street which is all about avoiding getting "Amazoned." Business Insider global editor-in-chief Henry Blodget says people were also talking about the same thing back in the 1990s.
Warren Buffett has been open about the kind of companies he would be interested in buying.
In his 2014 letter to shareholders, the Berkshire Hathaway chairman laid out six criteria.
Based on them, Bryan Adams, the Director of FactSet M&A, screened for companies that could be acquisition targets.
The one requirement that wasn't screened for was an offering price, since some companies may quietly be up for sale and in talks with Berkshire. Also, FactSet only included companies that earn much of their revenues in the US.
Here's how Adams screened, based on Buffett's specifications:
"All of the companies in our result set look like viable candidates, but does Buffett think so, and do they have a business that appears unassailable? We have no idea," Adams wrote.
With that in mind, here are eight companies that Adams thinks could be Buffett's targets:
Pretax Income: $1.598 billion
3-Year Average P/E ratio: 26.5
3-Year Average Return on Equity: 13.4
Management Tenure (Years): 12.2
Market Cap: $30.1 billion
Industry: Investment Managers
Pretax Income: $4.46 billion
3-Year Average P/E ratio: 18.6
3-Year Average Return on Equity: 11.6
Management Tenure (Years): 9.3
Market Cap: $68.2 billion
Cognizant Technology Solutions
Industry: Information Technology Services
Pretax Income: $2.357 billion
3-Year Average P/E ratio: 23
3-Year Average Return on Equity: 11.6
Management Tenure (Years): 19.4
Market Cap: $39.1 billion
See the rest of the story at Business Insider
Elliott Management Corp, the largest creditor of the bankrupt parent of Texas power transmission company Oncor Electric Delivery Co, is exploring putting together a bid for the company that would challenge Warren Buffett's $9 billion all-cash deal, people familiar with the matter said on Friday.
Elliott, the hedge fund run by billionaire Paul Singer, would seek to convert its debt in the company to equity, as well as raise new equity financing for its bid, the sources said.
While Elliott believes it can put together a higher bid than the deal announced on Friday by Buffett's Berkshire Hathaway Inc , it will wait for details on how Berkshire's deal will affect the company's creditors before it decides how to proceed, the sources said.
Elliott may also seek to use its rights as a creditor to Energy Future Holdings, the parent of Oncor, to block the sale of the company to Berkshire in bankruptcy court, according to the sources.
The sources asked not to be identified because the deliberations are confidential. Elliott declined to comment, while Oncor and Berkshire Hathaway did not immediately respond to requests for comment.
Elliott filed a lawsuit in May against Energy Future asking for it to consider debt reorganization alternatives, including a plan that would involve converting Elliott's significant debt holdings in the company to equity, eventually putting Oncor under the hedge fund's control. (Reporting by Jessica DiNapoli in New York; Editing by Meredith Mazzilli)
Warren Buffett is perhaps one of the most successful investors in the world. He is also one of the richest people in the world. Here are some lessons you can learn from the "Oracle of Omaha":
1. Live below your means
Warren Buffett has a net worth of 77 billion. But he still lives in the same house he bought in 1958 for only $31,500. Compared to his income and net worth, Warren Buffett lives frugally. The rest of his money is protection in case of emergencies. Because he lives frugally, he can also invest more money, which will reap more rewards. Not only will his wealth grow faster, but it is unlikely he will declare bankruptcy.
Consider this quote by him: "I’m not interested in cars and my goal is not to make people envious. Don’t confuse the cost of living with the standard of living."
2. Skip meetings and other unnecessary time wasters
Instead of having long, unnecessary meetings every year, Buffett sends a letter to each of his companies, praising victories from the past year, and stating his goal for the current year (see also: Warren Buffett’s “Not To Do” List). The result is he has more time to work on more productive projects and his employees have more time to work and accomplish goals.
Warren Buffett’s business partner Charlie Munger jokes about Buffett:
"You look at his schedule sometime and there’s a haircut. Tuesday, haircut day. That’s what created one of the world’s most successful business records in history. He has a lot of time to think."
3. Practice your communication skills
Buffett hated public speaking when he was younger, but he knew it was necessary for him to be successful. So he enrolled in a public speaking course that eventually broke down his fear of public speaking and helped him become a successful public speaker. He now tells young entrepreneurs that the key to success is good communication skills.
See the rest of the story at Business Insider
Warren Buffett is worth $77 billion, but you wouldn't know it from the way he lives.
The CEO of Berkshire Hathaway and one of the world's most famous investors still lives in the same house that he bought for $31,500 in 1958.
And his eating habits are just as low-key.
The 86-year-old begins each day with a McDonald's breakfast sandwich, and depending on how the markets are doing, he'll opt to be more or less frugal with his choice. On bad days he gets a Sausage McMuffin with egg and cheese for $2.95, and on the good days it's a bacon, egg, and cheese biscuit for $3.17.
Throughout his career, Buffett has also remained loyal to his favorite steakhouse in his hometown of Omaha.
Business Insider's video team traveled to Gorat's to see what it's like:
Gorat's in Omaha, Nebraska, opened in 1944. From the outside, it doesn't look like much.
A neon sign outside proclaims that it services the "finest steaks in the world."
The steakhouse is about a 7-minute drive from Berkshire Hathaway's HQ.
See the rest of the story at Business Insider
In the article “Malcolm Gladwell got us wrong,” the researchers behind the 10,000-hour rule set the record straight: Different fields require different amounts of deliberate practice in order to become world class.
If 10,000 hours isn’t an absolute rule that applies across fields, what does it really take to become world class in the world of work?
Over the last year, I’ve explored the personal history of many widely-admired business leaders like Elon Musk, Oprah Winfrey, Bill Gates, Warren Buffett, and Mark Zuckerberg in order to understand how they apply the principles of deliberate practice.
What I’ve done does not qualify as an academic study, but it does reveal a surprising pattern.
Many of these leaders, despite being extremely busy, set aside at least an hour a day (or five hours a week) over their entire career for activities that could be classified as deliberate practice or learning.
I call this phenomenon the 5-hour rule.
How the best leaders follow the 5-hour rule
For the leaders I tracked, the 5-hour rule often fell into three buckets: reading, reflection, and experimentation.
According to an HBR article, “Nike founder Phil Knight so reveres his library that in it you have to take off your shoes and bow.”
Oprah Winfrey credits books with much of her success: “Books were my pass to personal freedom.” She has shared her reading habit with the world via her book club.
These two are not alone. Consider the extreme reading habits of other billionaire entrepreneurs:
• Bill Gates reads 50 books per year.
• Mark Zuckerberg reads at least one book every two weeks.
• Elon Musk grew up reading two books a day, according to his brother.
• Mark Cuban reads more than 3 hours every day.
• Arthur Blank, co-founder of Home Depot, reads two hours a day.
• Billionaire entrepreneur David Rubenstein reads six books a week.
• Dan Gilbert, self-made billionaire and owner of the Cleveland Cavaliers, reads one to two hours a day.
Other times, the 5-hour rule takes the form of reflection and thinking time.
AOL CEO Tim Armstrong makes his senior team spend four hours per week just thinking. Jack Dorsey is a serial wanderer. LinkedIn CEO Jeff Weiner schedules two hours of thinking time per day. Brian Scudamore, the founder of the 250 million-dollar company, O2E Brands, spends 10 hours a week just thinking.
When Reid Hoffman needs help thinking through an idea, he calls one of his pals: Peter Thiel, Max Levchin, or Elon Musk. When billionaire Ray Dalio makes a mistake, he logs it into a system that is public to all employees at his company. Then, he schedules time with his team to find the root cause. Billionaire entrepreneur Sara Blakely is a long-time journaler. In one interview, she shared that she has over 20 notebooks where she logged the terrible things that happened to her and the gifts that have unfolded as a result.
If you want to be in to company of others who reflect on what they’re learning with each other, join this Facebook group.
Finally, the 5-hour rule takes the form of rapid experimentation.
Throughout his life, Ben Franklin set aside time for experimentation, masterminding with like-minded individuals, and tracking his virtues. Google famously allowed employees to experiment with new projects with 20% of their work time. Facebook encourages experimentation through Hack-A-Months.
The largest example of experimentation might be Thomas Edison. Even though he was a genius, Edison approached new inventions with humility. He would identify every possible solution and then systematically test each one of them. According to one of his biographers, “Although he understood the theories of his day, he found them useless in solving unknown problems.”
He took the approach to such an extreme that his competitor, Nikola Tesla, had this to say about the trial-and-error approach: “If [Edison] had a needle to find in a haystack, he would not stop to reason where it was most likely to be, he would proceed at once with the feverish diligence of the bee to examine straw after straw until he found the object of his search.”
See the rest of the story at Business Insider
Every summer, the top moguls of the tech, media, and business worlds gather in the sunny resort town of Sun Valley, Idaho for investment bank Allen & Co.'s annual week-long conference. They hobnob around town, talk business during conference sessions, and ride bikes through the mountains.
The 33rd annual event brought some of the wealthiest and most powerful people from around the world to Sun Valley once again, and we've gathered photos so you can see the power players that made the trek this year.
Here's who showed up:
Apple's CEO Tim Cook and senior VP of internet software and services Eddy Cue stick together in matching shirts.
This is quite a trio: Miramax co-founder Harvey Weinstein, Oath CEO Tim Armstrong, and Dell CEO Michael Dell.
Former eBay CEO John Donahoe braces himself for the coming week.
See the rest of the story at Business Insider
Sprint Chairman Masayoshi Son approached Berkshire Hathaway Chairman Warren Buffett to discuss a deal with the wireless-service provider, according to a report on Friday by The Wall Street Journal's Ryan Knutson and Shalini Ramachandran.
Son also met with John Malone, the cable mogul, at the Allen & Co. annual conference in Sun Valley, Idaho, the report said.
The Journal reported that details of the potential deal were unclear but that it could be an investment of over $10 billion in Sprint from Berkshire Hathaway.
Sprint shares gained as much as 4% after the news.
Amid fierce competition and price cuts among the largest telecoms companies, the chief financial officer of T-Mobile has said the company would benefit from a merger with Sprint. Sprint's controlling shareholder was gearing up for deal talks with T-Mobile's top shareholder, Deutsche Telekom AG, Reuters reported in May.
Berkshire Hathaway has announced big investments in recent months. The conglomerate's energy business agreed on July 7 to acquire Energy Future Holdings for $9 billion in cash. And in June, Berkshire granted a credit line of $2 billion Canadian dollars ($1.5 billion) to Home Capital, the embattled Canadian mortgage company.
Sprint shares are getting a boost on Friday.
News that Sprint executives approached Warren Buffett and cable mogul John Malone sent shares up as much as 2.8% in afternoon trading on Friday.
Chairman Masayoshi Son reached out to Buffett and Malone separately, according to the Wall Street Journal. Talks are at an early stage, and details around any possible investment in Sprint are unclear at the moment. One guess would have Berkshire Hathaway investing $10 billion in the telecom company, according to the Journal.
Son has been looking to merge or sell a large stake of Sprint in order to better compete against rivals Verizon and AT&T.
Sprint is down 2.75% so far this year, including Friday's bump.
I'm a Warren Buffett nerd. While most people watch series on Netflix for fun, I like to read through the archives of Berkshire's Annual Letters! Yeah, it's that bad.
But if you're reading this, I assume you're a little different, too. Maybe you're proud to be an investment nerd like me!
After all, being a Buffett nerd has its advantages. For one, I learned about the concept of an "economic moat." It's a principle that has made Buffett's investment company Berkshire Hathaway billions of dollars in profits. And it's become a guiding principle with my own investments.
In this article, I'm going to explain what an economic moat is and why it's one of Buffett's core investment tenants. But unlike Buffett, I'm not going to share how to use the principle to buy stocks. Instead, I'll show how small investors like you and me can build profitable economic moats using real estate investing.
Let's begin by discussing what an economic moat is.
What is an economic moat?
An economic moat protects the profits of a business from attacks by competitors. It's like a large moat of water around an ancient castle. A business with a wide economic moat has an enduring competitive advantage. This means its competitors have difficulty duplicating it.
For example, one of Buffett's investments is CocaCola. Around the world, the formidable CocaCola brandcreates a competitive advantage. No other maker of sugared water has been able to replicate their success with customers.
Buffett has long used this principle to evaluate and purchase his best investments. The results? $1,000 invested in Berkshire Hathaway at $19/share in 1964 would have been worth 11.6 million dollars in early 2015!
But what does this have to do with you? Should you try to be like Buffett and identify individual businesses with wide economic moats? Even Buffett himself advises most investors to just invest in a broad basket of index funds instead of picking individual stocks.
I've found you have to apply this principle more broadly than just stocks or bonds. Economic moats have worked best for me in the world of real estate investing.
Easier economic moats using real estate investing
With real estate investing, your can use your knowledge and skills to make more money investing. For example, you can study every property for sale or rent in a very small area. As the local expert, you can then find properties priced below their full value.
And unlike stocks sold on an exchange with millions of competing buyers, you often negotiate directly with the seller or their agent. This gives you a chance to do even better on price.
But not every piece of real estate will automatically have an economic moat. In the sections that follow, I'll share five competitive advantages you can look for with real estate investments:
Let's begin with pricing power.
Competitive advantage #1 — Pricing power
Buffett's favorite businesses are able to maintain and increase their prices over time. Their brand and products are unique in the marketplace. This means they don't have to cut prices to compete.
For example, Buffett has long owned Sees Candy, a specialty chocolate and candy company. Instead of competing on price, Sees has raised prices consistently over the years faster than its production costs.
This pricing power makes a company more profitable over time.
A well-located real estate property works in much the same way. An attractive property in a demand location is unique. Renters and buyers will pay progressively higher prices for the privilege of living there.
I wrote an entire guide on how to choose the ideal investment property location. But within that guide, I included several factors you should look for to find these high-demand investment properties. In summary, you want locations with:
I learned that the properties with the most pricing power are not always the properties you can buy the cheapest. In real estate investing, it pays to follow the lesson Buffett picked up from his long-time partner, Charlie Munger:
"It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price."
Competitive advantage #2 — Barriers to entry
Real estate investing has inherent barriers to entry. But if you can overcome these barriers, you'll create strong economic moats.
First, real estate is expensive compared to other investments. You can buy a share of stock for just $100. But even cheap real estate costs many thousands of dollars. This means real estate investors have to either save or borrow money for purchases.
Second, real estate investments require local knowledge. Some principles hold true across all real estate markets, but each local area has its own quirks and unique trends.
Third, real estate has a perceived "hassle" compared to other investments. Many would-be real estate investors sit on the fence because of horror stories they've heard about tenants and toilets.
All three of these barriers to entry can be solved with knowledge, systems, and relationships. And the more difficult the better, because that creates an even wide moat.
Competitive advantage #3 — High-switching costs
Acquiring new customers is expensive. So, the most profitable companies work to keep their customers for a long time. High customer switching costs help them do that.
High switching costs are anything that makes it harder for a customer to leave. For example, you pay a fee and go through a lot of hassle to switch away from one of the big cell phone companies. This is VERY intentional on their part.
The right real estate can also have very high switching costs. And this can make you a lot of money as a real estate investor.
One of my favorite examples is a real estate investor and teacher from Colorado named David Tilney. David likes to invest in single family houses. He finds that renters of houses tend to stay longer. Often, his tenants have kids and stuff, both of which make it more of a hassle to move (i.e. high switching costs). Small apartments, on the other hand, are much easier to move in and out of. As a result, they also attract more transient tenants.
But David takes it a step further. He looks for what he calls "mouse trap houses." These houses are loaded with storage, like a 2-car garage, basement, and an attic. What do tenants do? They pile lots of junk in them. Amazingly, the tenants find most other rentals have much less storage, and as a result, they stay with David for 5-10 years on average!
Smart real estate investors can also do more to increase the cost of switching for tenants. Mike Butler, author of the great book Landlording on Autopilot, offers his tenants incentives before each lease renewal. For example, he may give them partial free rent or a property upgrade. By moving, the tenant would now "lose" this benefit, and Mike avoids the costs of a turnover for another year or two.
Competitive advantage #4 — Low-cost advantages
Warren Buffett loves to buy businesses with built-in cost advantages. For example, his insurance company GEICO has always sold insurance direct to customers instead of through agents. This saves GEICO 10-15% in commissions, and as a result, allows them to offer lower prices to customers while still making a profit.
I like buying existing properties (instead of new housing) to give me a low-cost advantage in real estate. New construction material costs tend to rise with the overall inflation level of the market. And as I said in a previous section, local factors like a limited supply of land and government regulations increase the costs of construction even more.
As a result, my existing properties often cost much less than comparable new properties, even after remodeling. This allows me to keep rents much lower than the new construction prices while still making a profit. Not only does this make it easier to keep my properties full, but it also protects me from future recessions or price slumps.
I also like that in real estate investing we can lock-in our biggest cost – interest rates on loans – for very long periods of time. When your rents go up over time (see #1 – Pricing Power) yet your biggest cost is fixed, you have a recipe for a VERY profitable investment over time.
Competitive advantage #5 — Trade secrets
The final competitive advantage is a catch-all category called trade secrets. Some businesses develop processes, patents, or new technology that allows them to build enormous economic moats to keep out the competition.
I would have a hard time understanding and identifying the value of these trade secrets with stocks, but in real estate, you can actually develop them for yourself.
Here are just a few ideas of real estate investing trade secrets I've used or have seen others use over the years:
I'm willing to bet you can find even more trade secrets to make yourself more competitive in real estate investing. That's the beauty of owning investments that you can personally impact.
Become a builder of moats
Warren Buffett has made billions of dollars for a reason. He invests with solid principles, like buying businesses with economic moats. He's also extremely smart, and he surrounds himself with other smart people like his partner Charlie Munger.
And as a Buffett nerd, I've tried to inspire you to model his success. But you don't have to copy him exactly. Instead, you can model his principles and apply them to real estate investing. It's an investment arena that allows you to create and protect your own investing success.
I wish you all the best with your own investing adventures!
Warren Buffett rarely has good things to say about hedge fund managers, but he makes exception for the two he hired for his holding company. Todd Combs and Tedd Weschler, who managed their own hedge funds before joiningBerkshire Hathaway together manage about $21 billion of Berkshire's wealth, but they do it for next to nothing when compared to the traditional hedge fund operation.
Buffett has let details of their compensation plans trickle out over the years, noting at one point each earned as little as $1 million in base compensation plus 10% of the returns they generate in excess of the return of the S&P 500 index. If both were to outperform the market by a percentage point, they could stand to collect $21 million in bonus compensation on an annual basis.
If it sounds like a lot, it is, but their compensation pales in comparison to the prototypical hedge fund model. Hedge funds traditionally operate under the so-called "2-and-20" fee model, in which managers take a 2% management fee on assets plus 20% of returns. Berkshire is effectively paying 0.01-and-10, less than half the typical take of the quintessential hedge fund fee.
The power of incentives
Buffett and Charlie Munger have spent more time than most thinking about the power of employee incentives and compensation, which shows in the unique way Berkshire pays its portfolio managers.
Bonuses are doled out for performance over rolling three year periods, and 20% of the bonus pool is actually tied to the other portfolio manager's performance. Buffett says that linking part of their compensation to the other's performance ensures that Combs and Weschler will have every reason to work together, rather than hoard their best ideas.
A rolling three-year period for measuring performance isn't a unique compensation feature, but it does create an important incentive structure for Combs and Weschler. Because of it, neither manager has the incentive to make high-risk bets to catch up to the index when their returns lag the S&P 500, nor do they have an incentive to liquidate their portfolios and sit on their hands when they develop a sizable lead. Whether they crush the market, or lag it, their performance in any given quarter or year will eventually roll off as time passes by. Win or lose, past performance is irrelevant for incentive compensation after three short years.
Buffett pointed out at the 2017 annual shareholders meeting that the two have seen their portfolios grow because he has given them more to invest, and because they effectively "retain their own earnings," which allows their earnings to compound with the performance of their portfolios. Thus, their long-term records play an indirect role in how much they earn managing Berkshire's billions.
The low-cost hedge fund model
Neither shareholders nor Berkshire's portfolio managers should have any complaints about the compensation model. When its managers outperform, Berkshire's stock portfolio will beat the S&P 500, even after compensation is taken into consideration. When its managers underperform, compensation and other expenses add up to less on a percentage basis than Berkshire would pay to hold most S&P 500 index funds.
Besides direct compensation, costs are minimal. Buffett noted in a CNBC interview that Combs has two analysts working underneath him, who are based out of New York. Weschler has an assistant in Charlottesville, VA, where he lives roughly half the week he isn't in Omaha. Therefore, all-in expenses for research and other purposes are a mere rounding error, given that his two lieutenants manage about $21 billion of capital.
Whether Berkshire's younger portfolio managers can live up to Buffett's market-beating record remains to be seen, but Buffett has proven to be almost as reliable at picking managers as he has been at picking stocks. In a now-famous article he penned in 1984 titled "The Superinvestors of Graham-and-Doddsville," Buffett explained that a small group of investors who he had come to know closely put up performance that topped the index over long careers, thanks to a value-oriented investment framework that Buffett employs for his own stock picking.
SEE ALSO: Snap is a dead stock walking