The Rational Investor #044: What We Can Learn from Buffett’s Real Estate Investments
Happy Saturday to you,
Welcome to the 44th edition of The Rational Investor Newsletter.
Today’s quote comes from an article that Warren Buffett published in Fortune Magazine back in 2014. It’s titled “What You Can Learn from My Real Estate Investments.” We generally think about Buffett and stocks, so you won’t find it surprising that he uses his real estate to teach us a lesson about stock investing. The entire article is worth reading (it’s only four pages), but the quote below is the highlight of the article for me.
Onto the main event…
Here’s Warren Buffett on His Real Estate Investments [emphasis is mine]:
“My two purchases were made in 1986 (a Nebraska farm) and 1993 (a NYC retail property). What the economy, interest rates, or the stock market might do in the years immediately following -- 1987 and 1994 -- was of no importance to me in determining the success of those investments. I can't remember what the headlines or pundits were saying at the time. Whatever the chatter, corn would keep growing in Nebraska and students would flock to NYU.
There is one major difference between my two small (real estate) investments and an investment in stocks. Stocks provide you minute-to-minute valuations for your holdings, whereas I have yet to see a quotation for either my farm or the New York real estate.
It should be an enormous advantage for investors in stocks to have those wildly fluctuating valuations placed on their holdings -- and for some investors, it is. After all, if a moody fellow with a farm bordering my property yelled out a price every day to me at which he would either buy my farm or sell me his -- and those prices varied widely over short periods of time depending on his mental state -- how in the world could I be other than benefited by his erratic behavior? If his daily shout-out was ridiculously low, and I had some spare cash, I would buy his farm. If the number he yelled was absurdly high, I could either sell to him or just go on farming.
Owners of stocks, however, too often let the capricious and irrational behavior of their fellow owners cause them to behave irrationally as well. Because there is so much chatter about markets, the economy, interest rates, price behavior of stocks, etc., some investors believe it is important to listen to pundits -- and, worse yet, important to consider acting upon their comments.
Those people who can sit quietly for decades when they own a farm or apartment house too often become frenetic when they are exposed to a stream of stock quotations and accompanying commentators delivering an implied message of "Don't just sit there -- do something." For these investors, liquidity is transformed from the unqualified benefit it should be to a curse.
A "flash crash" or some other extreme market fluctuation can't hurt an investor any more than an erratic and mouthy neighbor can hurt my farm investment. Indeed, tumbling markets can be helpful to the true investor if he has cash available when prices get far out of line with values. A climate of fear is your friend when investing; a euphoric world is your enemy.
During the extraordinary financial panic that occurred late in 2008, I never gave a thought to selling my farm or New York real estate, even though a severe recession was clearly brewing. And if I had owned 100% of a solid business with good long-term prospects, it would have been foolish for me to even consider dumping it. So why would I have sold my stocks that were small participations in wonderful businesses? True, any one of them might eventually disappoint, but as a group they were certain to do well.”
Clearly, Buffett is bringing Benjamin Graham’s Mr. Market allegory to life.
The ultimate lesson here is that the whims of the market can only be detrimental to long-term investors like us if we allow fear to dictate our actions. As we proceed into election week, this may be timely advice to remember in case the market gets squirrelly.
If it does, it can be helpful to remember that ALL previous declines have been opportunities to buy more shares of great companies at discounted prices.
There’s no doubt that buying during tumultuous times is easier said than done. But consider this, “What Would Buffett Do?”
He’d be buying…
Thanks for reading. I’ll be back next week with more timeless wisdom from great investors.
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