Negative Equity

Below is a chart (click to enlarge) of the percent of homeowners in each state with negative equity or near negative equity in their home.

Negative Equity: Situation where the market value of a mortgaged asset is below the amount of loan taken against it.

Munger Rule

The Charlie Munger Rule:

When a guy is offering you free money don’t listen to the rest of the sentence.

Tom Barrack on Real Estate

This is just awesome stuff from billionaire real estate entrepreneur Tom Barrack:

Keep it simple and go where they are not!

The trip to Baja and the simple and consistent waves at SS reminded me of the real estate business. There is so much real estate in the world that one does not need to be in a frenzy to acquire it. Since there is no real exchange and it is definitely not homogeneous there is plenty of it for everyone. My first partner in life used to tell me, "Every time you think you are so brilliant at real estate look out the window and see what you did not build, what you do not own and what you did not finance." No one anywhere owns more than 1 percent of any market in any asset. There are really relatively few big players who know the way down the signless dirt roads to the pristine spots and it is simple and easy to see what they are doing. Real estate is a simple business and bricks and mortar can be exchanged privately without the parade of horribles that we have discussed. There is no need for a "digital odometer." It normally moves in a lumpy fashion through private treaty trades and in a lagging fashion to the world around it.

The challenge with real estate is simply one of the amount of "risk" which is inherent in the investment. Usually, that risk is measured in terms of the perceived quality of the assets and the quantity and cost of debt used to acquire or refinance an asset. Real Estate on a cash basis is very forgiving and a simple and effective "capital preservation" tool. We change its risk profile by demanding higher and higher returns from the same asset by changing the capital structure or adaptive re-usages. The use of debt and debt instruments turbo charges yields and raises the risk curve without regard to the underlying cost of capital.

Best Marketing Advice Ever - Have a Good Product

From the legendary Drayton Bird:

........I really must apologise for the utter banality of most of my marketing advice, as it seems to consist of a series of blinding glimpses of the obvious without nearly enough long words or references to social media.

However, since I often make the most fatuous mistakes myself (I committed an unforgivable sin a few weeks ago that I have long advised others against) maybe I should just carry on dishing out these platitudes.

So let's talk about what matters most.

Three weeks ago, stranded in Brooklyn, and too damn incompetent or idle to go to the laundrette, I went to Macy's to buy some underpants. I bought their own brand, and they are the worst-fitting, least- elasticated-where-they-should-be load of rubbish I've ever wasted money on. And one of the 5 T- shorts I bought to go with them ripped on first use.

I bet the big cheeses who run Macy's don't buy their own underwear. In fact I bet the big cheeses who run most large businesses don't use their own products or services, because (this is going to sound so sad) I also bought some underpants a few weeks ago from Marks and Spencer. They used to be famous for their underwear - but these were almost as bad as Macy's. So I guess Sir Stuart Rose, capo di tutti capi at M & S, doesn't buy his own stuff either.

Macy's are not doing too well. Nor are M & S. But in the US, Target are on a a roll. So after my failure at Macy's I went there and squandered a few dollars on their stuff. It fits perfectly. So I suspect the people who run Target do buy their own stuff. And after my failure at M & S (get a life, Drayton) I went to H & M and bought their. Also much better. And also, I suspect, because the people there deliver what they promise (cheap stuff that's value for money) and keep an eye on the store.

I guess you see where I'm going with this, but just to rub it all in, take French Connection. They're having their problems, and I think I can see why. No big secret. Their stuff is just not very well made for the money. Someone there clearly thinks the solution is one of the silliest advertising campaigns I've seen for a while, top left. It isn't.

Everyone spends a huge amount of time effort, syllables, powerpoint slides and all-round bullshit on marketing, and it is all a complete waste if you don't deliver something good and make sure you are doing so - in person.

Munger Quote

A great quote from Charlie Munger:

"When you picked your wife, you picked the best who would take you. We should live the rest of our lives like that.”

Liar Loans Part Deux

From real estate consultant John Burns:

Does anyone really think that homeowners can afford to pay 60% of their income for housing? Apparently, the architects of the latest loan modification program called HAMP do. Government officials are touting that they are saving the housing industry by modifying more than 1 million loans to date, and converting 170,000 of those to "permanent" status, with many more to come.

Those so-called "permanent modifications" cost the Borrower 31% of their income today, but the Borrower still has 60% of their income going to total debt obligations (credit card, HELOC, car payment, etc.). These statistics, known as the Back-end Debt to Income ratio, can be found on page 4 located here . Although not disclosed, we believe most of these loans exceed 100% LTV today as well. This is nothing more than a fully documented version of the same garbage that took down the banking system two years ago, and this time the Federal government rather than Countrywide and New Century are underwriting it. Almost all of these Borrowers will eventually re-default.

It is very obvious that the architects of HAMP are short-term focused, and are tricking us into thinking they are solving the problem by calling these permanent modifications. Until these loans are renamed, let's call them "Liar Loans 2," except this time the liar is the Bank of the United States rather than the Borrower because this modification is anything but "permanent". We do believe that stabilizing home prices and the banking system are critical to the recovery of the U.S. economy, but let's at least tell the truth about what is being done.

What this means for you is that the housing recovery that is being touted by elected officials is far from assured. There will be fewer homeowners thrown out on the street this month than would have occurred otherwise, but they will be tossed out later. The modification programs have helped stabilize home prices around the country, mostly because they have created so much confusion that people can live in their home for free for one year or more, and are buying time for thousands of banks to continue improving their balance sheets with earnings from good loans, while deferring the write-off of bad loans. The biggest beneficiaries of this program are the banks with the largest Home Equity Loan portfolios, which are also the banks needed to provide capital to businesses to start hiring again.

How does this change things? We will be adding 170K additional future foreclosures to our forecast, with many more to come, and guiding our clients through these turbulent times by analyzing every indicator we can get our hands on. Despite the negative tone of this email, there are and will continue to be plenty of opportunities to make money, particularly taking advantage of the distressed selling that will go on for years, but having a long term investment horizon. Also, the national housing market is becoming more local than ever, which means those with local market knowledge, or the ability to roll up all of the local factors into a national view, will make the most money. In other words, those who do their homework will get straight A's.

Life Lessons from Buffett and Munger

The Reading for Your Success blog has a fantastic post about life lessons learned from Charlie Munger and Warren Buffett.

13 Life Lessons from Warren and Charlie:

1. Lose money and I will forgive you, but lose even a shred of reputation and I will be ruthless [Warren]. This has been echoed across the business world for years and it applies to us all. Life is too short to cut corners to make an extra buck. Wealth can always be recreated but reputation takes a lifetime to build and often only a moment to destroy. As Warren says, “we will not trade reputation for money.”

2. The best defense in a tough economy is to add the most you can to society. Your money can be inflated away but your knowledge and talent cannot [Warren]. No matter the external circumstances, you are always in control of your talent, learning and passion for life. “There will always be opportunities for talent” as Warren says.

3. We get worried when people start to agree with us [Warren]. The best fruit is found out on the limbs. The road less traveled makes all the difference. Make a rule to always stay on the side of the minority in your life’s path and you will likely be greatly rewarded and you’ll certainly experience a lot more excitement.

4. We celebrate wealth only when it’s been fairly won and wisely used [Charlie]. The goal is not to make money at all costs. It’s easy to forget that in a lot of industries and sub-cultures around the U.S. where everyone is in constant competition to keep up with the Jonses. Wealth is worthless if you’ve destroyed all your relationships to attain it. As Charlie says “take the high road. It’s far less crowded.” Sad but often true. Makes it pretty easy to stand out.

5. When you are exceptional you jump off the page. There really isn’t that much competition there [Warren]. Be your own best competitive advantage. Then it doesn’t make a difference what others are doing. You are in control.

6. Do what you’re passionate about. If you do this, there will be few people competing or running faster than you [Warren]. The best way to be exceptional is with passion! As Tony Robbins says every day of his life, “Live with Passion!” And trust me, life is a lot more fun this way.

7. I think I developed courage when I learned I could deal with hardship. You need to get your feet wet and get some failure under your belt [Charlie]. Courage does not grow on it’s own. Just like a muscle, it must be constantly worked out and developed. Life begins outside your comfort zone and that is where your courage is developed. Most people don’t succeed because they’re afraid to fail. Failure isn’t that bad anyway. It will make you tougher and more likely to win the next time around. No one has succeeded without going through their own failures at some point. To try and fail is much better than to never try. Why not get started early and get some of them out of the way! What’s the worst that could happen anyway? As big wave surfer Laird Hamilton says “If you’re not falling then you’re not learning.”

Charlie Learning

8. There’s no better way to be happier than getting your expectations down [Charlie]. Most unhappiness comes from misaligned and unrealistic expectations of life. Expect the world of yourself, but expect nothing of the world. Then you can not help but live your life pleasantly surprised.

9. If I can be optimistic while I’m nearly dead, you can deal with a little inflation [Charlie]. This had the crowd laughing out loud. Life is what you make it. Don’t let things get you down. It could always be worse.

10. If the only reason you find for doing something is because others are doing it then that’s not good enough [Warren].Enough said.

11. Bad behavior is contagious. That’s how human nature works [Warren]. Watch out for this. It can catch you off guard.

12. We’ve done a lot of stupid things but we’ve avoided a small subset of stupidity and that subset is important. It’s about avoiding the dumb things [Charlie]. They hammer this every year. Their success does not come from doing so many things right. It comes from avoiding the things that are terribly wrong. Some say this is two sides of the same coin. But it’s not. It requires a fundamental shift in psychology. The stories are endless of people who did a few things right and were massively successful, but then did something stupid that took them back to zero. Before Charlie and Warren do anything, they “invert, always invert” as Charlie says. They list every way imaginable in which they could fail at a particular task and then take massive effort to avoid those failures. Do that and the success will come automatically.

13. Go to bed a little wiser than when you woke up [Charlie].This covers the whole meeting in a word. Life is about learning. If you are always learning you can never lose. Keep this as your only rule for the day and the world be yours for the taking.

Go to bed a little wiser than when you woke up.

-Charlie Munger

The lessons from Warren and Charlie are endless. We can all stand to learn and be better people from what they are willing to share. They don’t charge any money or ask for anything in return. Except of course that we live a life with a burning desire to learn and do all we can to be valuable additions to society. Take these lessons to heart. There will likely not be another Warren and Charlie for a very long time. Take advantage of the education while you can. Do so and I have a feeling success and fulfillment will come naturally.

Gotta Love Nashville

Who Owes Who What?

This will not end well.

As economist Don Boudreaux stated on his blog:

Rescuing Greece isn’t the end of the problem, it’s more akin to the Bear Stearns rescue of March 2008. It’s just the beginning of something that won’t end well.

100 Year Flood?

Sorry for the lack of activity on this blog over the last few days.

Over the weekend, Nashville experienced what may turn out to be a 100 year flood.

Please keep this city in your prayers as we try to move forward with cleaning up the city and trying to deal with the devastation this storm has caused.