There is enough noise when we evaluate what we would like to purchase. This whether it’s a computer or a piece of business that you would like to buy. Often the noise leads us astray and we make unwise purchases.
There is a piece yesterday on Warren Buffett about him sharing his real estate investment. I think many can learn a lot of different things from this article.
Specifically, Buffett is under no illusion about his great disadvantage in the area of competence.
I felt that what swayed his purchase have always been that to make up for his lack of competence he always have the people to make up for it.
The ultimate criteria have always been “How much am I paying for that goose”
- You don’t need to be an expert in order to achieve satisfactory investment returns. But if you aren’t, you must recognize your limitations and follow a course certain to work reasonably well. Keep things simple and don’t swing for the fences. When promised quick profits, respond with a quick “no.”
- Focus on the future productivity of the asset you are considering. If you don’t feel comfortable making a rough estimate of the asset’s future earnings, just forget it and move on. No one has the ability to evaluate every investment possibility. But omniscience isn’t necessary; you only need to understand the actions you undertake.
- If you instead focus on the prospective price change of a contemplated purchase, you are speculating. There is nothing improper about that. I know, however, that I am unable to speculate successfully, and I am skeptical of those who claim sustained success at doing so. Half of all coin-flippers will win their first toss; none of those winners has an expectation of profit if he continues to play the game. And the fact that a given asset has appreciated in the recent past is never a reason to buy it.
- With my two small investments, I thought only of what the properties would produce and cared not at all about their daily valuations. Games are won by players who focus on the playing field — not by those whose eyes are glued to the scoreboard. If you can enjoy Saturdays and Sundays without looking at stock prices, give it a try on weekdays.
- Forming macro opinions or listening to the macro or market predictions of others is a waste of time. Indeed, it is dangerous because it may blur your vision of the facts that are truly important. (When I hear TV commentators glibly opine on what the market will do next, I am reminded of Mickey Mantle’s scathing comment: “You don’t know how easy this game is until you get into that broadcasting booth.”)
Another take away have been from this paragraph:
Here, too, the analysis was simple. As had been the case with the farm, the unleveraged current yield from the property was about 10%. But the property had been undermanaged by the RTC, and its income would increase when several vacant stores were leased. Even more important, the largest tenant — who occupied around 20% of the project’s space — was paying rent of about $5 per foot, whereas other tenants averaged $70. The expiration of this bargain lease in nine years was certain to provide a major boost to earnings. The property’s location was also superb: NYU wasn’t going anywhere.
Remarkably, in this Singapore property craze, seldom do I hear of people measuring the value of things in the form of unleveraged yield, that is taking out the noise debt causes in valuing things.
With razor thin current yield of 2.2-4% it is astounding that we still find this a “bargain”
[Buffett’s annual letter : What you can learn from my real estate investments | Fortune]