Dear Thoughtful Investor,
“Are you picking up nickels in front of a steam roller?” This question was from my biggest investor. I had recently spent two hours on the phone with him walking through, in detail, exactly what the hypothetical losses of his capital could be if the real estate market softened, corrected, or utterly collapsed. It was an uncomfortable picture - what if you pick up one nickel too many and the steam roller pins your shoelace to the concrete floor and then in a magnificent slow motion display of momentum and mass eats you alive.
Around our office we call the 2008 financial crisis “the war”. At some point with most investors and homebuilders we talk to the conversation inevitably turns to “where were you during the war?” In this industry - residential construction lending - you cannot get away from it. Now that we have seen real estate prices go up the last five years in a row it is hard not to cry BUBBLE!! and run for the exits. I get asked almost once a day about the real estate market. “What do you think is going to happen?” someone whispered to me in a coffee shop - somehow intuitively knowing how much confidence plays a role in investment markets - perhaps if the 7 people in the coffee shop heard the word ‘bubble’ it could trigger a cascading chain reaction of disastrous events that would wipe out 58% of real estate values - the butterfly effect in action.
So this is my purpose for writing. I write to you - The Thoughtful Investor - you are not the ultra-wealthy or elite. You cannot pull political strings or engineer golden parachutes. You might have started your own business maybe recently or maybe decades ago - or you powered through a corporate career - first an associate, then a manager, then a vice president. You worked, you showed up, you created something, and you have some net worth - enough so that if you are smart you will be just fine but certainly not enough to speculate on tulip futures. You are at a point where you need to be making money off of your money instead of from your time but you cannot be picking up nickels in front of a steam roller.
Mix into this picture the extremely tumultuous political and economic circumstances. These are today’s questions but they will replaced by a new set of uncertainties which will be replaced by another set: Will the Affordable Healthcare Act be repealed? Will President Trump get his tax reform package passed? Will North Korea send a nuclear bomb over to Seoul? What about terrorist attacks? Is there going to be a wall? Who’s going to pay for the wall? Will populist leaders get elected across Europe? What is China going to do? What about interest rates? Is the Fed going to raise them? What if there’s another recession? Are equities going to keep going up - I don’t want to miss out but when is the correction going to happen? Events in such disparate locations did not used to matter and following European political theatre used to be a hobby not an investment strategy. We live in a different world today - a world so interconnected by a million miles of fiber optic cable and beaming WiFi that what happens in Vegas no longer stays in Vegas - information is contagious and along with it fear and confidence.
This is going to be fun - a series of letters, a conversation between me to you as Thoughtful Investors. We explore real estate investing, take a hard look at central banking, discuss financial history, and pontificate on the best way forward, but most importantly we will try to decide that, given what is (politically, financially, culturally) what should we do to steward our resources; to be disciplined enough to leave the nickels and avoid the steam roller. The goal is to yield a harvest and protect it as fiercely as possible - not to be greedy but to be generous. Not because we are trying to accumulate the most in a world of scarcity, but because there is abundance and it is available to the bold to go and to get it. And ultimately because impotentes defendere libertatem non possunt - those without power cannot defend freedom.
Oh, and what about my investor’s question around the steam roller? We’ll talk about that too.
A Thoughtful Investor