July 31, 2009

Stats on Our Side

Very interesting read from Paul Ormerod on the history of the length of time of recessions:

Since the late 19th century, there have been 255 recessions in western economies. Of these, 164 have lasted just one year and only 32 have lasted for more than two years. In other words, two-thirds of recessions last a single year, and only one in eight lasts more than two years. If we strip out the peculiar circumstances at the end of the two world wars, 70 per cent of all recessions last just one year.

Let's hope the numbers stay on our side for this current recession.

Paul Ormerod is also the man behind one of my favorite business lines.

Mr. Ormerod is often asked the question, "How do I build a small firm for myself."

Mr. Ormerod's classic answer is: "Buy a very large one and wait."

Bigger Can Mean Better - At Least in CRE

The law firm Orrick, Herrington & Sutcliffe LLP just signed the biggest office lease so far this year in Manhattan.

The law firm signed a lease for 220,000 square feet in the Black Rock office building (CBS headquarters).

According to the WSJ article, the deal was done in the low-to-mid $70's per square foot, and CBS, who owns the building, agreed to spend $150 per square foot to renvote the space (that's $33,000,000 in renovations).

When Orrick first started their search for space two years ago, asking rents for Class A Manhattan office space were $120 - $140 per square foot and build-out allowances were in the $45 per square foot range.

Oh, how things can change in such a short period of time.

The two big takeaways from this story are:

1) Patience is in deed a virtue
2) Being a 220,000 sf user sure can be nice

July 30, 2009

Five W's

It feels way too long since I posted something about or by Charlie Munger, so I will share the following story Munger tells in, arguably the greatest business book ever written, Poor Charlie's Almanack.

The story centers around one of the business practices of Carl Braun, who founded and ran the C.F. Braun Engineering Company.

"He (Carl Braun) had another rule from Psychology, which, if you're interested in wisdom, ought to be part of your repertoire ----like the elementary mathematics of permutations and combinations.

His rule for all of the Braun Company's communications was called the Five W's---you had to tell who was going to do what, where, when, and why. And if you wrote a letter or directive in the Braun Company telling somebody to do something, and you didn't tell him why, you could get fired. In fact, you would get fired if you did it twice.

You might ask why is that so important? Well, again, that's a rule of psychology. Just as you think better if you array knowledge on a bunch of models that are basically answers to the question, why, why, why, if you always tell people why, they'll understand it better, they'll consider it more important, and they'll be more likely to comply. Even if they don't understand your reason, they'll be more likely to comply."

Blowing a hole in PowerPoint

After two years of earning my MBA, I vowed to do everything I could to avoid being associated in any way, shape, or form with PowerPoint.

I am partially convinced one of the primary reasons I became a commission commercial real estate broker was to avoid the endless barrage of PowerPoint presentations that seems to go hand-in-hand with corporate life.

I just finished this fantastic piece from the Armed Forces Journal written by retired Marine T.X. Hammes. The title of the article is Dumb-dumb Bullets.

Some of the highlights from the article:

Every year, the services spend millions of dollars teaching our people how to think. We invest in everything from war colleges to noncommissioned officer schools. Our senior schools in particular expose our leaders to broad issues and historical insights in an attempt to expose the complex and interactive nature of many of the decisions they will make.

Unfortunately, as soon as they graduate, our people return to a world driven by a tool that is the antithesis of thinking: PowerPoint. Make no mistake, PowerPoint is not a neutral tool — it is actively hostile to thoughtful decision-making. It has fundamentally changed our culture by altering the expectations of who makes decisions, what decisions they make and how they make them.

......PowerPoint has clearly decreased the quality of the information provided to the decision-maker, but the damage doesn’t end there. It has also changed the culture of decision-making. In my experience, pre-PowerPoint staffs prepared two to four decision papers a day because that’s as many as most bosses would accept. These would be prepared and sent home with the decision-maker and each staff member that would participate in the subsequent discussion. Because of the tempo, most decision-makers did not take on more than three or four a day simply because of the requirement to read, absorb, think about and then be prepared to discuss the issue the following day. As an added benefit for most important decisions, they “slept on it.”

PowerPoint has changed that. Key decision-makers’ days are now broken down into one-hour and even 30-minute segments that are allocated for briefs. Of particular concern, many of these briefs are decision briefs. Thus senior decision-makers are making more decisions with less preparation and less time for thought. Why we press for quick decisions when those decisions will take weeks or even months to simply work their way through the bureaucracy at the top puzzles me. One of the critical skills in decision making is making the decision cycle and method appropriate to the requirements. If a decision takes weeks or months to implement and will be in effect for years, then a more thoughtful process is clearly appropriate.


From a recent article in the San Francisco Chronicle:

The owners of a premier San Francisco office tower plan to forfeit the property to their lenders, the city's second distressed transaction involving a major commercial building in recent weeks and another sign of the growing pressures in the sector.

Hines and Sterling American Property decided to transfer their interest in 333 Bush St. to the original financers, following the surprise dissolution of law firm Heller Ehrman in September, according to a letter Hines sent to local real estate brokers and obtained by The Chronicle. The 118-year-old law firm defaulted on its 250,000-square-foot lease, leaving the nearly 550,000-square-foot property 65 percent vacant.

More distressed deals are expected. Nearly three-quarters of Class A office buildings downtown sold between 2005 and 2007, a bonanza that drove up prices to all-time highs and squeezed the ratio of rental income to cost to record lows. But the economic collapse sharply reduced rent and occupancy levels, making it increasingly difficult for landlords to meet their debt obligation.

This brings us back to one of this blog's favorite maxims compliments of Howard Marks:

Leverage + Volatility = Dynamite

July 29, 2009


For Sale By Owner (FSBO).

"Why should I use a broker when I can sell the property myself and save on commission costs? "

I am often asked this question in the early stages of meeting with potential clients.

My answer is fairly simple.

I tell potential clients they may not in fact need a broker. I then to proceed to go through a series of IF's with them.

You don't need to hire a broker if......

1) You have the time to market the property yourself on a daily basis

2) You have the resources and staff to market the property yourself on a daily basis

3) You have the market knowledge to properly price your property and market your property yourself on a daily basis

4) You have access to the leading Internet resources like Costar, LoopNet, Xcelligent, etc. to market your property on a daily basis to the local brokerage community (just because you aren't using a broker doesn't mean your potential buyer isn't)

5) You have a network of tenants, investors, and owner/users to call on to market your property to on a daily basis

6) You have all the appropriate paperwork and checklists handy to ensure that if you can successfully market and sell your property it is done with all of the I's dotted and T's crossed.

7) You are ready, willing, and able to make marketing and selling your property a full-time gig.

If a potential client can put a check next to all seven of the If's above, he or she does not need me.

The absolute worst reason an owner can use to decide not to use a broker is because they want to "save money".

I have an accountant friend who thinks like this. Technically, from an accounting standpoint, he may be correct. If you use a broker, the broker will potentially get paid $0.06 of every $1.00 you receive. However, what my accountant friend doesn't consider is what all accountants refuse to consider: OPPORTUNITY COST

The idea of opportunity cost is very well illustrated in this exchange between Marge and Homer Simpson. In this episode of The Simpsons, Homer had acquired a large amount of sugar and decided to stop going to his job at the nuclear power plant and instead start a career as a sugar salesman:

"Homer: And you didn't think I'd make any money. I found a dollar while I was waiting for the bus." [Homer triumphantly shows the one dollar bill he found for Marge]

Marge: While you were out earning that dollar, you lost forty dollars by not going to work. "

July 28, 2009

Getting Fleeced

I just had to share the following passage from Michael Lewis' newest book Home Game: An Accidental Guide to Fatherhood:

At some point in the last few decades, the American male sat down at the negotiating table with the American female and -----let us be frank-----got fleeced. The agreement he signed foisted all sorts of new paternal responsibilities on him and gave him nothing of what he might have expected in return. Not the greater love of his wife, who now was encouraged to view him as an unreliable employee. Not the special love from his child, who, no matter how many times he fed and changed and wiped and walked her, would always prefer her mother in a pinch. Not even the admiration of the body politic, who pushed him into signing the deal. Women may smile at a man pushing a baby stroller, but it is with the gentle condescension of a high officer of an army toward a village that surrendered without a fight. Men just look away in shame. And so the American father now finds himself in roughly the same position as Gorbachev after the fall of the Berlin Wall. Having shocked the world by doing the decent thing and ceding power without bloodshed for the sake of principle, he is viewed mainly with disdain. The world looks at him schlepping and fetching and sagging and moaning beneath his burdens and thinks.... OH.....YOU.....POOR....BASTARD.

The Lag of Commercial Real Estate

"Historically, commercial real estate has been a lagging indicator of economic activity by six to nine months. The process generally starts with job layoffs, often continues with office space reduction, and finally leads to disposition (through subleasing, lease expiration, or sale)." - Bill Goade - President and CEO of Cresa Partners.

This chart below goes a long way in demonstrating what Mr. Goade's above statement:

July 27, 2009

Leasing 101 - Part 8

8) BATNA: Gotta love acronyms

  • Best Alternative To a Negotiated Agreement
  • Always have an alternative to consider
  • If you think your current landlord is going to give you a deal on a lease renewal, you may be playing with fire
  • Know the market and have alternatives.
  • This will also increase your leverage and allow you to understand whether or not you are getting a deal that makes sense for your company

CRE Update

Since the second quarter of 2007, we have seen a 300% increase in commercial real estate loan delinquencies.

From the Fortune article that featured the above chart:

U.S. banks hold some $1.8 trillion worth of commercial loans, according to Federal Reserve data. Big regional banks, including PNC of Pittsburgh, KeyCorp of Cleveland and BB&T of Richmond, Va., have more than half their loan books in commercial loans.

The next 18 months could be very interesting for commercial real estate.

July 26, 2009


James Montier took down the Effeicient Market Hypothesis (EMH), and now is taking on the Andrew Lo, the creator of the Adaptive Market Hypothesis. The AMH is a new version of the EMH with a little Charles Darwin thrown in the mix.

Along with his former partner in crime Albert Edwards, Montier takes on a recent article Lo wrote in the Financial Times touting his supposed new and improved AMH.

......we are less convinced that AMH is a terribly useful concept. As we understand it, the AMH provides a halfway house where sometimes markets are irrational and sometimes they are rational. We would argue that the amount of time that markets are rational is near negligible. Instead markets seem to be in a constant state of disequilibrium – moving from boom to bust and back again, rarely if ever stopping off at “normal”.

We’d agree with Prof Lo that the human brain has been designed by a process of evolution, which leaves us potentially ill-equipped to deal with the world in which we now find ourselves. However, evolution is a glacial process, and as such we wouldn't expect human brains to evolve any time soon. So bubbles, booms and busts born of human nature are likely to be with us for the foreseeable future.

July 25, 2009

More than meets the emotional eye

It's so easy to get caught up in the emotions of big, bold, and scary statements like "47 million uninsured Americans".

When you get past the emotional reponse and dig a little into the details, you realize there is usually more to it than originally thought:

July 24, 2009

What was true then........

From the latest issue of the must-read publication Grant's Interest Rate Observer:

"The power to raise or depress the monetary unit of value is a power to destroy men's faith in the honor of a Government and its laws.....Their sense of betrayal, and their perception of the fact, are expressed by the non-equivalence in exchange often disclosed between the undebased coin and the debased coin, between the coin and the promise to pay converted into legal tender.....Not for the first 72 years of this country's history did Congress attempt to slip a legal tender issue past the people. That it did so during the 'imagined exigency' of the Civil War did not change the fact that it was a 'legalized injustice'.

No Executive and no Legislature is fit to be trusted with the control it involves over the earnings and savings of the people. No earthly sovereign or servant is capable of a just exercise of such authority to impair and pervert the obligation of contracts."

These words were spoken in 1885 by then Secretary of the Treasury Daniel Manning.

I am not as nearly educated on the subject of monetary policy as I would like to be, but what Daniel Manning said in 1885 seems to make a whole lot more sense compared to what I am hearing out of some folks in Washington in 2009.

July 23, 2009

Small Biz by the Numbers

According to the U.S. Small Business Administration, there were 27.2 million businesses in the United States.

Of the 27.2 million businesses:

98% had less than 100 employees

89% had less than 20 employees

79% had less than 10 employees

61% had less than five employees.

I don't know why, but these numbers really blew me away. It is pretty amazing to think nearly 90% of the more than 27 million businesses in the United States have fewer than 20 employees.

Big Ben on CRE

In yesterday's Senate Banking Committee hearing, Fed Chairman Ben Bernake had the following to say about commercial real estate:

“As the recession’s gotten worse in the last six months or so, we’re seeing increased vacancy, declining rents, falling prices -- and so, more pressure on commercial real estate. We are somewhat concerned about that sector and are paying very close attention to it. We’re taking the steps that we can through the banking system and through the securitization markets to try to address it.”

July 22, 2009

Something to keep in mind......

"The American people will never knowingly adopt Socialism. But under the name of 'liberalism' they will adopt every fragment of the Socialist program, until one day America will be a Socialist nation, withoutknowing how it happened."

Norman Thomas, six-time candidate for President of the United States for the Socialist Party of America, made the above statement in a interview in 1948.

If you need a reminder of the definition of socialism, here you go:

Socialism refers to any one of various theories of economic organization advocating public or collective ownership and administration of the means of production and distribution of goods, and a society characterized by equal access to resources for all individuals with a more egalitarian method of compensation.

CRE - Good Bad News


Commercial real-estate prices fell 7.6% in May, according to Moody's Investors Service, as both dollar volume and transaction count reached record lows in the nine-year history of the firm's Commercial Property Price Indices.

The indexes are down 29% from a year ago and 35% from their October 2007 peak.

The commercial real-estate sector has suffered since mid-2008 as the recession deepened, vacancies increased and new owners have been unable to refinance mortgages. Retail and hotel properties have been hit especially hard in the commercial sector.

"Large commercial real-estate price declines in the last two months suggest that a bottom may be starting to form, although higher transaction volumes would be necessary in order to draw any definite conclusions," Moody's Managing Director Nick Levidy said.

Office buildings fared worst, dropping 29% from a year earlier, while industrial buildings were the best performers, down 12%. Apartment buildings in the South suffered a 21% drop, with a 23% slide in Florida, one of the worst-hit states by the housing crisis and global recession.

The sooner we can get to the bottom, the sooner we can start climbing back to a new top.

July 21, 2009

Are You Serious?

Take a very close look at the picture below.

Would you believe me if I told you the blue and the green in the picture are actually the exact same color.

From the Discover Magazine blog where I found this fascinating optical illusion:

"The reason they look different colors is because our brain judges the color of an object by comparing it to surrounding colors. In this case, the stripes are not continuous as they appear at first glance. The orange stripes don’t go through the "blue" spiral, and the magenta ones don’t go through the "green" one."

"This is why I tell people over and over again: you cannot trust what you see even with your own eyes. Your eyes are not cameras faithfully taking pictures of absolute truth of all that surrounds you. They have filters, and your brain has to interpret the jangled mess it gets fed. Colors are not what they appear, shapes are not what they appear (that zoomed image above is square, believe it or not), objects are not what they appear."

July 20, 2009

Tom Barrack - CRE Market Update

A great interview with real estate billionaire and CEO of Colony Capital Tom Barrack.

Why is it so hard to get new funding?

Partly because new equity is needed from the owner to provide any loan because the underlying real estate is 30%-50% less valuable than it was at the time of origination. Where is that going to come from? Everybody's tapped out. All the real estate guys have gone from G4's to electric golf carts.

The object of the drill for everyone in commercial real estate--and this is everyone in the world--is just get to the other side of Death Valley. If you can make it to the other side of Death Valley, there's hope. But even when the economy does start to roll out, commercial real estate takes a while behind the tail of that economy to catch up.

Is the CMBS market more complex than the residential mortgage-backed securities market?

Yes. You have a multitude of tenants and you have a multitude of income streams and thousands of varying properties. You have to be a nuclear physicist to understand the architecture of what happens in the event of default on these deals. It's all untested.

Where is the opportunity for smart investors right now?

The new equity in real estate is buying and restructuring debt. The rescue business is the business of the moment.

What's your outlook for the American economy?

When we shift all our energy from all the whining and crying and entitlement of what the past was, we're going to figure it out. American ingenuity and entrepreneurism is the best of brand everywhere in the world. The good news is nobody made a mistake, everybody's net worth got wiped out together on a no-fault basis. We all got marked to market together.


Looking at the graph below, it may not be long before we can make a Weimar Republic joke: Hey America, the Weimar Republic called and wants its inflation back.

In case your eyesight is a little strained, that bar on the far right does in fact reach the $23,000,000,000,000 mark.

Banks, Battles, and Overconfidence

What more could I ask for?

One of my favorite writers writing about psychology, Winston Churchill, and finance.

Malcolm Gladwell's latest piece in this month's The New Yorker is a classic example of why Malcolm Gladwell, like Michael Lewis, is one of the greatest writers around. He has an amazingly curious mind and always finds a unique way to analyze an issue.

His latest piece, Cocksure - Banks, battles, and the psychology of overconfidence is just another reason you would be better off getting a PhD in psychology than an M.B.A.

From the article:

.....The psychologist Ellen Langer once had subjects engage in a betting game against either a self-assured, well-dressed opponent or a shy and badly dressed opponent (in Langer’s delightful phrasing, the “dapper” or the “schnook” condition), and she found that her subjects bet far more aggressively when they played against the schnook. They looked at their awkward opponent and thought, I’m better than he is. Yet the game was pure chance: all the players did was draw cards at random from a deck, and see who had the high hand. This is called the “illusion of control”: confidence spills over from areas where it may be warranted (“I’m savvier than that schnook”) to areas where it isn’t warranted at all (“and that means I’m going to draw higher cards”).

.....Several years ago, a team headed by the psychologist Mark Fenton-O’Creevy created a computer program that mimicked the ups and downs of an index like the Dow, and recruited, as subjects, members of a highly paid profession. As the line moved across the screen, Fenton-O’Creevy asked his subjects to press a series of buttons, which, they were told, might or might not affect the course of the line. At the end of the session, they were asked to rate their effectiveness in moving the line upward. The buttons had no effect at all on the line. But many of the players were convinced that their manipulation of the buttons made the index go up and up. The world these people inhabited was competitive and stressful and complex. They had been given every reason to be confident in their own judgments. If they sat down next to you, with a tape recorder, it wouldn’t take much for them to believe that they had you in the palm of their hand. They were traders at an investment bank.

.....This is what social scientists mean when they say that human overconfidence can be an adaptive trait. “In conflicts involving mutual assessment, an exaggerated assessment of the probability of winning increases the probability of winning,” Richard Wrangham, a biological anthropologist at Harvard, writes. “Selection therefore favors this form of overconfidence.” Winners know how to bluff. And who bluffs the best? The person who, instead of pretending to be stronger than he is, actually believes himself to be stronger than he is. According to Wrangham, self-deception reduces the chances of “behavioral leakage”; that is, of “inadvertently revealing the truth through an inappropriate behavior.” This much is in keeping with what some psychologists have been telling us for years—that it can be useful to be especially optimistic about how attractive our spouse is, or how marketable our new idea is. In the words of the social psychologist Roy Baumeister, humans have an “optimal margin of illusion.”

July 19, 2009

Suffering Well

In my Sunday School class here in Nashville, we just started a study of the book of James.

I wanted to share what I believe is one of the most profound, challenging, and inspiring verses in the New Testament.

James 1: 2-4 reads: Count it all joy, my brothers, when you meet trials of various kinds, for you know that the testing of your faith produces steadfastness. And let steadfastness have its full effect, that you may be perfect and complete, lacking in nothing.

July 18, 2009


From a recent article in Money Week:

......to behaviouralists it's no surprise to find investors behaving irrationally. James Montier, formerly of Société Générale, points to an experiment he took part in involving over 1,000 players who were asked to pick a number between 0 and 100 that they believed would be close to two-thirds of the average number picked.

There's no correct answer – it depends on what others do. But there is a clear maximum answer: 67, which would require every other player to have chosen 100. What was "more than slightly alarming" was that there were a large number of answers above 67. All 1,000 players were professional investors.

This goes a long way in helping understand just why Montier is so fervently opposed to the Efficient Market Hypothesis

Leasing 101 - Part 7

7) Base Year: Much more important than you ever thought

  • In most modified gross leases, the rent includes the costs of providing all of the normal building services,and the tenant is required to pay the landlord for its pro-rata share of increases in the costs of such services over time.
  • Because the Base Year is used each year to measure cost increases, it is imperative that the Base Year be reflective of what it normally costs to run the building.

Marks' Memos

I am a big believer in studying people that are a whole lot more smarter and more successful than I am. I vainly believe that if I study people who are smarter and more successful than I am, I may one day be as smart and successful as they are.

One of the individuals I have been studying for the past two years is Howard Marks. Mr. Marks is the Chairman of California-based Oaktree Capital Managment.

Every couple of months, Mr. Marks puts out a memo on whatever subject he happens to be thinking about at the time. The memos are always amazingly insightful, entertaining, and thought provoking. The lastest memo, So Much That's False and Nutty, is absolutely briliant.

Marks' latest installment takes a look at the various causes of the current economic crisis and makes some recommendations for how we can potentially avoid another crisis like this one in the future.

From Marks' memo:

The truth is, risk tolerance is antithetical to successful investing. When people aren’t afraid of risk, they’ll accept risk without being compensated for doing so . . . and risk compensation will disappear. This is a simple and inevitable relationship. When investors are unworried and risk-tolerant, they buy stocks at high p/e ratios and private companies at high EBITDA multiples, and they pile into bonds despite narrow yield spreads and into real estate at minimal “cap rates.”

Part of the accepted wisdom of the pre-crisis years was that long-term institutional investors should load up on illiquid investments, capitalizing on their ability to be patient by garnering illiquidity premiums. In 2003-07, so many investors adopted this approach that illiquidity premiums became endangered. For example, as of the middle of 2008, the average $1 billion-plus endowment is said to have had investments in and undrawn commitments to the main illiquid asset classes (private equity, real estate and natural resources) equal to half its net worth. Some had close to 90%.

Investors’ desire to earn money makes them willing to do things they haven’t done before, especially if those things seem modern and sophisticated. Technological complexity and higher math can be seductive in and of themselves. And good times and rising markets encourage experimentation and erase skepticism. These factors allow Wall Street to sell innovative products in bull markets (and only in bull markets). But these innovations can be tested only in bear markets . . . and invariably they are.

When considering a course of action, we should ask, “Is it right?” Not necessarily the cleverest practice or the most profitable, but the right thing? The people I think of perverting the mortgage securitization process never wondered whether they were getting an appropriate rating, but whether it was the highest possible. Not whether they were doing the right thing for clients or society, but whether they were wringing maximum proceeds out of a pile of mortgage collateral and thus maximizing profits for their employers and bonuses for themselves.

July 17, 2009

Give 'Em Hell Zell

Former Democrat Senator from the great state of Georiga Zell Miller really hit the nail on the head in a recent speech:


July 16, 2009

P.T. Barnum and The Art of Money Getting

When President Lincoln and his family entertained the world famous General Tom Thumb (made world famous by Mr. Barnum himself), Lincoln asked Tom if he had any suggestions about handling the war.

“Mr. President,” Tom replied, “my friend Barnum could settle the whole thing in a month.”

The more I read about P.T. Barnum, the more I am amazed at what he was able to accomplish throughout his life. He was a prolific writer, a journalist, a dynamic speaker, a master marketer, a millionaire, a politician, an abolitionist, a best-selling author, a maker of men and women, and founder of the Greatest Show on Earth.

Here is a link one of Mr. Barnum’s most famous speeches. The speech is entitled “The Art of Money Getting.” The speech was given well over 100 years ago and there is not a lesson that doesn’t directly apply today.

Please take time to read this speech. I definitely think you will find it as useful and powerful as I did.

Here are some of favorite excerpts of the speech:

Those who really desire to attain an independence, have only to set their minds upon it, and adopt the proper means, as they do in regard to any other object which they wish to accomplish, and the thing is easily done. But however easy it may be found to make money, I have no doubt many of my hearers will agree it is the most difficult thing in the world to keep it. The road to wealth is, as Dr. Franklin truly says, "as plain as the road to the mill." It consists simply in expending less than we earn.

The safest plan, and the one most sure of success for the young man starting in life, is to select the vocation which is most congenial to his tastes.

Young men starting in life should avoid running into debt. There is scarcely anything that drags a person down like debt.

Work at it, if necessary, early and late, in season and out of season, not leaving a stone unturned, and never deferring for a single hour that which can be done just as well now.

I hold that every man should, like Cuvier, the French naturalist, thoroughly know his business.

So in regard to wealth. Go on in confidence, study the rules, and above all things, study human nature.

Men should be systematic in their business. A person who does business by rule, having a time and place for everything, doing his work promptly, will accomplish twice as much and with half the trouble of him who does it carelessly and slipshod.

Politeness and civility are the best capital ever invested in business.

Montier's Nine Rules

I really can't get enough of James Montier.

In a recent article Montier laid out his nine rules for value investing. Montier is specifically addressing investing in securities in this article, but I think these rules could just as easily be applied to investing incommercial real estate.

1. Value, value, value

The price I pay for an investment determines its likely return. No asset is so good as to be immune from the possibility of overvaluation, and few assets are so bad as to be exempt from the possibility of undervaluation.

Investments should be purchased with a margin of safety. Any estimate of intrinsic value will only prove to be correct via the intervention of luck, so buying only when a large discount to that estimate is available offers protection against being wrong.

2. Be contrarian

As Sir John Templeton observed: "It is impossible to produce superior performance unless you do something different from the majority." Following a value-oriented approach will almost certainly lead you to a contrarian stance because you are generally buying the unloved assets and selling the market's darlings.

3. Be patient

As Ben Graham wrote: "Undervaluations caused by neglect or prejudice may persist for an inconveniently long time and the same applies to inflated prices caused by over-enthusiasm or artificial stimulants."

Cheap stocks can always get cheaper and expensive stocks can get more expensive, so patience is required.

4. Be unconstrained

Many professional managers are forced to be specialist, but they should have the freedom to invest where they think the opportunities lie. There may be times, such as last year, when my analysis tells me the best place to be is net short. Early last year, my screens were throwing up the highest number of short ideas I have ever seen.

5. Don't forecast

The folly of forecasting is one of my pet hobby-horses. I can't understand why so many investors spend so much time engaged in an activity that has so little value, and so little chance of success.

6. Cycles matter

As Howard Marks of Oaktree Capital puts it, we may not be able to predict, but we can prepare. All sorts of cycles exist – economic, credit and sentiment to name but three.

7. History matters

Sir John Templeton also observed that: "This time is different" were the four most dangerous words in investing.

8. Be sceptical

Bruce Springsteen once remarked that: "Blind faith in anything will get you killed." I share this view on the dangers of the lack of critical thinking.

9. Be top-down and bottom-up

While stock selection is best approached from the bottom up, ignoring the top-down can be extraordinarily expensive. The last year has been a perfect example of why understanding the top-down can benefit and inform the bottom-up.

Commercial Closings by the Numbers

Here are the latest figures for commercial real estate closings for the second quarter for Metro Nashville (Davidson County). I have compared the 2009 statistics to the 2nd quarter stats for 2006, 2007, and 2008.

New Blog

Please check out this new blog from one of the smartest people I have ever had the pleasure to know:

July 15, 2009

Leasing 101 - Part 6

6) Operating Expenses: Management matters

  • Before you sign a lease, have your broker ask to see a copy of the expense statement from the previous three years.
  • Have expenses been increasing from year-to-year?
  • If so, find out why?
  • Ask to see an operating budget for the current year.
  • What is the CAM or Load factor for the building?
  • How does the Landlord define operating expenses?
  • Who manages the building?
  • What is the management company’s reputation?
  • Have you talked to existing tenants about the building’s management?
  • A building that is poorly managed is a bad building.

July 14, 2009

Market Musings

The two most recent office sales in my market area both sold at a 40% discount to their original asking prices.

The first building, located in Nashville's Music Row submarket, was originally put on the market at $2.5 million or $198 per building square foot. From 2005 - 2007 it was very common for Music Row commercial buildings to sell anywhere from $200 - $300 per building square foot.

The building sat on the market for nine months and finally sold for $1.425 million or $115 per building square foot. The sales price represented a 42% discount from the original asking price.

The second builing, located in Nashville's SoBro district, was originally put on the market for $675,000 or $194 per building square foot.

The building sat on the market for nearly 24 months and finally sold for $403,500 or $115 per building square foot. The sales price represented a 40% discount from the orginal asking price.

An owner recently chastised me for sending out information stating that property values had dropped by as much as 40% in some instances.

I certainly understand the idea of a self-fulfilling prophecy and the need for positive thinking. However, I also understand the idea of knowing your market and studying your market.

Property values may rise 20% by next summer or they may drop another 10%. I don't claim to predict the future, but I do think it's a broker's job to know and study the market and communicate his knowledge to people he wants to influence.

As Warren Buffett said about good news and bad news: "Always give bad news immediately. Good news typically takes care of itself."

Big Jim Boss

You don't tug on Superman's cape

You don't spit into the wind

You don't pull the mask off the old Lone Ranger

And you don't mess around with Jim, da do da do...

I think Jim Croce forgot to mention one thing you should never do: Miss anything written by Michael Lewis.

Michael Lewis, best selling author of Moneyball and Blindside, is one of those rare intellectual talents that can make any subject he writes about interesting. I still contend the article Lewis wrote about his high school baseball coach, Coach Fitz, for the New York Times Magazine is one of the best articles ever written on any subject.

Lewis' latest piece, entitled The Man Who Sank the World's Economy is a fascinating study in finance, human folly and human vanity.

The piece focuses on A.I.G. Financial Products division and how one man, Joe Cassano, who ran A.I.G. F.P., helped bring the financial world to its knees.

I want to specifically point to two parts of Lewis' article.

The first is financial:

In a normal economy, when interest rates rise, consumer borrowing falls - and in the normal end of the U.S. economy that happened: from June 2004 to June 2005 prime-mortgage lending fell by half. But in that same period subprime lending doubled - and then doubled again. In 2003 there bad been a few tens of billions of dollars of subprime-mortgage loans. From June 2004 until June 2007, Wall Street underwrote $1.6 trillion ($1,600,000,000,000) of new subprime-mortgage loans and another $1.2 trillion ($1,200,000,000,000) of so-called Alt-A loans - loans which for some reason or another can be dicey, usually because the lender did not require the borrower to supply him with the information typically required before making a loan.

The second is psychological:

The problem is that they (his subordinates) knew him (Cassano). Andy they believe that his crime was not mere legal fraudulence but the deeper kind: a need for subservience in others and an unwillingness to acknowledge his own weaknesses. "When he said that he could not envision losses, that we wouldn't lose a dime, I am positive that he believed that," says one of the traders. The problem with Joe Cassano wasn't that he knew he was wrong. It was that it was too important to him that he be right. More than anything, Joe Cassano wanted to be one of Wall Street's big shots. He wound up being its perfect customer.

Numbers matter. Spreadsheets matter. Formulas matter.

But so does leadership, psychology, and the vanity of human wishes, wants, and desires.

A.I.G. F.P.'s collapse ultimately came down to the numbers, but the numbers were driven by men like Cassano, whose megalomania blinded them to the reality that their seemingly impenetrable financial system was really skating along on extremely thin ice.