It’s no surprise Warren Buffett’s Annual Shareholder Letters always provide a "necessary trace of wisdom" that seems to satisfy the appetites of a variety of value investors. However, in the most recent shareholder letter, Buffett offers up some savvy advice directed at real estate investors.
In an exclusive excerpt from his upcoming shareholder letter, Buffett looks back at a pair of real estate purchases and the lessons they offer equity investors. Buffet explained an investment in a 400-acre farm near Tekamah, Neb., that he bought in 1986 for $280,000. In addition, he wrote about a strip center that he and his partners acquired in 1993 from the Resolution Trust Corporation.
Buffett explained that both deals had been bought at distressed pricing levels and that the two investments were "solid and satisfactory holdings for my lifetime and, subsequently, for my children and grandchildren."
Market Timers are Speculators
In real estate terms, investors often substitute the words "margin of safety" for "buy low, sell high" and as Buffett explained in the letter, "the unleveraged current yield from the property was about 10%…and its income would increase when several vacant stores were leased. Even more important, the largest tenant — who occupied around 20% of the project’s space — was paying rent of about $5 per foot, whereas other tenants averaged $70. The expiration of this bargain lease in nine years was certain to provide a major boost to earnings. The property’s location was also superb: NYU wasn’t going anywhere."
Of course we know that Buffett was not boasting about his sharp shooting real estate investments. Instead he was purposely providing practical advice for long-time value investors. Buffett was explaining that stocks and real estate should be treated as a long-term asset class where, even though prices go up and down, the most important thing is to buy when Mr. Market is less interested.
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Buffett explained that folks that seek immediate gratification are like market timers and investors should
keep "things simple and don’t swing for the fences. When promised quick profits, respond with a quick ‘no.’"
Buffet added, "If you instead focus on the prospective price change of a contemplated purchase, you are speculating."
Buffett was reasoning that it’s best to be in the market, invested in value stocks that offer the highest potential returns than play a timing game.
Buffett explained, "Games are won by players who focus on the playing field — not by those whose eyes are glued to the scoreboard. If you can enjoy Saturdays and Sundays without looking at stock prices, give it a try on weekdays."
Whether it’s real estate or stocks, Buffett makes the case that there is simply no way to accurately and consistently time short-term market movement and "forming macro opinions or listening to the macro or market predictions of others is a waste of time."
A Few Long-Term REIT Investments
During the REIT sell-off a few months back I was able to take advantage of Mr. Market’s exuberance. Always seeking a "margin-of-safety", I picked up shares in a few "blue chip" REITs that I intend to treat like Buffett’s farmland. That is, I bought these stocks when they were cheap and now I plan to sit back and reap the highest returns.
It’s true. Because I’m a value investor, I feel as though my latest picks offer me a stress-free route in which I can "sleep well at night."
My SWAN (sleep well at night) picks include Realty Income (O), Ventas (VTR) and Digital Realty (DLR). All are considered "blue chip" REITs that are commonly associated with consistent earnings and growing dividends. Since purchasing shares in these 3 REITs, my returns have averaged double-digits and I’m taking advantage of my "free ATM" plan by reinvesting my dividends. Like Buffett was explaining, I’m not sweating out "quick profits" — instead, I’m investing for the long-haul with the power of compounding.
At the time of publication the author is long O, VTR, and DLR.
This article was republished with permission from TheStreet.