Might Warren Buffett's just published Annual Letter apply to us?

Question

Takeaways from Buffet’s shareholders letter that was just published;

1. “Warren Buffett bemoaned a lack of viable acquisition targets…”   Ditto - harder to find viable deals on SFHs and MFs.

2. “But I will never risk getting caught short of cash.”   Ditto!

And, food for thought...

3. Buy back shares; “With lots of cash and no acquisition targets, Berkshire continued to buy back shares at a healthy clip, helping boost its stock price.”   Hmm.  Respective of REI, could this equate to adding principal paydowns (re-amortization) as part of a modified strategy that might better position us as investors vs buying another property at this time?

Mike Dymski · Answer

Paying down debt for a couple of years leaves less cash, not more.  And without a refinance, next month's mortgage payment is still due.

When you have reached financial independence and preservation of capital is the goal, it's easy to make the decision to sit on cash.  Not so much before then.  Idle cash over the past five years while people have been predicting a crash would have cost real estate investors a lot more than they ever would have lost in a correction.

If we can't get a better return on our capital than the cost of debt (say 5%), it makes financial sense to pay down debt (i.e. Berkshire is saying they get a better (risk adjusted) ROE buying back stock than using that capital to invest in growing the business).

Account Closed · Answer

This is a capital allocation decision.  When you are making more money than you know what to do with, you have a high-class problem.  Hopefully, you'll do something intelligent with your bounty.

You have enough cash on hand.  You can't find anything worth buying because every potential deal is overpriced.  Why not pay down or off your debt?  Once your debt is paid off, you'll have even more money on your hands than you know what to do with.  Rich people might even have to lend money to Uncle Sam for awhile by buying Treasury bills.

Nathan Gesner · Answer

It's interesting to think about but I don't live in the same world as Warren Buffet. I do expect the market to start changing but I'm continuing to buy. If you purchase properties that cash flow, you should be fine during any slow-down or correction.

Bill F. · Answer

@Matthew McNeil While I am a huge Warren Buffet fan, as others have said, those takeaways aren't that applicable to REI.

-There is next to no comparison for what BH buys and us. Here are their acquisition criteria from 2000:

Look at #1. $50M in before tax earnings. That means the company sold at least in the $100M-300M range two decades ago.

-Their need for cash and our need for cash our very different. They own multiple insurance and re-insurance companies and have become the buyer of first resort. Just for those two reasons having cash and lots of it makes sense. Plus, in 1998 and 2008 the Fed called them up to act as a private sector solution to a liquidity crisis. Jay Powell and Steven Mnuchin aren't' calling anyone on BP if a bulge bracket firm gets in trouble again.

-As others have said, share buy backs and debt pay down are different.  That is not to say that principal pay down could not be an intelligent move in certain circumstances, but its a whole different can of worms than stock buyback.

That isn't to say the Annual report isn't packed with great info. What was everyone else's favorite take away?

Patrick M. · Answer

Buying back shares and paying down principal have 2 different effects. Companies buy back stocks to increase their value- paying down principal will not increase the value of your asset.

Paying down your principal will reduce the cash you have on hand. And there is a real possibility the value of the asset you have all of your cash tied up in will decrease when it becomes a buyers market.

William Glass · Answer

How about Buffett changing up the format of the SHL due to the new accounting rules?

It reminds me of appreciation in real estate throughout time. Before the '08 crash, the value of property soared and then post-crash it fell. As long as you purchased cash flowing property or weren't highly levered you were in good shape. The "value of the property" didn't matter if you were buying and holding for the long-term.

Granted in REI the fluctuations are much slower than the volatility in stock prices day to day, quarter to quarter. Still, the new accounting rules make Berkshire's balance sheet look more like Zillow's Zestimate bouncing around all the time.

I'm excited to hear what Warren and Charlie have to say at the Annual Meeting this year.

Bill F. · Answer

Here are my top three takeaways from the letter to shareholders:

1. "...our prime goal in the deployment of your capital: to buy ably-managed businesses, in whole or part, that possess favorable and durable economic characteristics. We also need to make these purchases at sensible prices."

Best investing advice anyone could ever get. If you do that, you will make money.

2. "We use debt sparingly. Many managers, it should be noted, will disagree with this policy, arguing that significant debt juices the returns for equity owners. And these more venturesome CEOs will be right most of the time. At rare and unpredictable intervals, however, credit vanishes and debt becomes financially fatal. A Russian-roulette equation – usually win, occasionally die – may make financial sense for someone who gets a piece of a company’s upside but does not share in its downside.... Rational people don’t risk what they have and need for what they don’t have and don’t need."

I'm standing by for the chorus of "Yea...but Real Estate is different" Ok, but how different?

3. "Charlie and I happily acknowledge that much of Berkshire’s success has simply been a product of what I think should be called The American Tailwind. It is beyond arrogance for American businesses or individuals to boast that they have “done it alone.” The tidy rows of simple white crosses at Normandy should shame those who make such claims."

Might Warren Buffett's just published Annual Letter apply to us?

Most Popular Reply