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The Real Estate Philosopher


How to OUT Perform in the Real Estate World

Feb 15, 2018

I start my thinking with a book I read by Howard Marks (of Oak Tree fame).  The book is called The Most Important Thing: Uncommon Sense for the Thoughtful Investor, and gives a good deal of thoughtful investment advice from a long-term successful investor.  By the way if you buy his book because of my article I think I get a penny from Amazon.  Just sayin…..

Anyway, Marks asks a question at the outset of his book, which is ‘do you want to outperform in the first place?’
 
Of course you want to outperform you might say, but that answer is very flawed.
 
In order to “out”-perform what must you do?  The answer – as Marks points out -- is both obvious and at the same time quite worrisome:
 
         You must be ‘different’
 
You must take a – huge – chance in not following the herd.  You have to be different or by definition you will do the same as everyone else and thereby not “out”-perform.
 
And – like it or not – if you are ‘different,’ there is a chance you will outperform and there is also a chance you will underperform.  This is mathematically tautological. 
 
Now consider the implications of this in your organization.  Does your organization – or its clients – tolerate failure? 
 
What happens if you outperform?  Probably a bigger bonus or economic upside. 
 
What happens if you underperform?  Is it loss of your job, loss of your clients, going out of business? 
 
If the downside of underperforming is worse than the upside of outperforming, then – obviously – you should not try to outperform as it is just plain old foolish.
 
So, therefore, the first thing one must do is decide if you want to take the risk and try to outperform or play it safe.
 
Marks makes this point in his book as well – that a company should decide up front if it wants to try to outperform or not. 
 
And to be clear, there is nothing wrong with trying to be average.  Consider that Warren Buffett tells all of us (dumb investors like me) to just put our money in an index fund.  We are not striving to outperform –we seek to be average.
 
To conclude this first part of my article, if you want to try to outperform and your organization will not tolerate underperformance, then you should quit and go to another place with a different risk/reward tolerance. 
 
So, now that you have decided you do want to outperform how should you do it?  Here are my thoughts – some of which have appeared in prior articles:

  1. Be ‘different’ – as stated above.   You simply cannot do what everyone else is doing.  And boy is this scary.  

  2. Avoid the four classic food groups of real estate – those are almost by definition destined to be average.  Unless you have a special angle (i.e., you are ‘different’ within the four food groups) you will end up average on a long-term basis.  Perhaps if you really do this type of investing ‘better’ you might move the needle a little bit in the outperformance direction but I suspect not that much. 

  3. Don’t try to time the market.  Sooner or later you will get nailed.  This is just long-term gambling. 

  4. Build a Power Niche.  I won’t get into it here, since I have spoken about it so much in prior articles, but the essence of a Power Niche is creating something ‘different’ and ‘owning’ it.  It is the only thing I have really seen that is likely to drive outperformance on a long-term basis.  Strangely, most people just won’t listen to me here or if they do they just cannot understand what a Power Niche is.  Or even if they do they won’t spend the time to build it.  And the irony is that it is so easy to do.  If you want to talk about this in depth, feel free to give me a call.  

  5. Cultivate a way of thinking that when ‘everyone’ tells you that you are wrong or stupid or worse that this means there is a decent chance you are really onto something.  I have done this myself.  It is almost like a bell-weather for me.  When everyone gangs up on me, saying ‘Bruce you have lost your marbles!’ that is a sign that I either have a brilliant idea or a really stupid one.  At that point, I dig deeper to hopefully keep the brilliant ideas and dump the dumb ones.  I mean who would build a law firm based on a hedgehog that stands for love?  Somehow I didn’t do too badly with that idea – an idea that everyone told me was ‘insane’ at the time I came up with it. 

  6. Finally – I am putting below my list of “don’t’s” in driving long-term performance that I put in my previous article.  I think most of those ideas are useful to the goal of outperformance so it is good to have them all in one place. 

I hope this is helpful and I wish everyone reading this the best of success.


The Real Estate Philosopher’s List of Don’t’s for Long-Term Real Estate Investment
 
Don’t do the following:

  • Don’t let the animal spirits in the market change your underwriting.  Those clients who tell me mournfully:  “Bruce – I haven’t done a deal in over a year,” don’t let that push you to do something foolish.  Not doing deals is a bummer – doing a bad deal is a terrible, awful, horrible bummer that you regret for the (sometimes many) years you are stuck dealing with it – not to mention what it does to your long-term track record.

  • Don’t try to time the market.  You just can’t do it.  The goal should be long-term value creation knowing that in the short run market swings will help or hurt you. 

  • Don’t put yourself in a high-overhead situation where you are pressured to do deals that are not good ones

  • Don’t rush off to different geographies if the market you really know gets too expensive.  This is consistent with Warren Buffet’s admonition “If you can’t run your own business successfully it doesn’t make sense to then enter a new business you know nothing about.” 

  • Don’t ‘hunker down’ – I would never advocate that as it implies you are trying to time the market based on the theory that it is too high now and it will go lower and of course you will know just the right moment to jump in.  Of course keep on looking for good deals, which are harder to find and/or require different intellectual capital to unearth. 

  • Don’t sit by and let the brokers be the ones creating the value.  Instead of hoping brokers – or others – will call you with deals, I advocate that you be the one who “creates” the deals by figuring out a market – an assemblage – a change of use – or another way to “create” the value in the deal. 

  • Don’t fool yourself into thinking that it is better to chase higher yields with higher risk.  If you do this, you haven’t really changed the risk profile of your business – it is really the same thing in the end in terms of expected upside.  The goal, of course, is to take advantage of situations in which the risk/reward does not balance but instead tips in your favor.

  • Don’t continue to do what you have already been doing.  The definition of insanity – we all know – is doing the same thing again and again and expecting a different result.  If doing the same thing day after day doesn’t result in deal flow, then try something else.

  • Unless you have a special strategy, considering avoiding the (four?) basic real estate food groups.  Everyone is looking at them and it is doubtful you will find a great risk/reward there right now.

  • Follow the view that “competition is evil,” so avoid competition as much as possible.  As Michael Porter (and other great thinkers emphasize) it is much more important to be “different” than to be “better.”

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As the Chairman of Duval & Stachenfeld – a law firm in mid-town NYC known as The Pure Play in Real Estate Law – I am inviting you to join The Real Estate Philosopher™. This will consist of my thoughts and also thoughts of friends and colleagues.

It will not be published in any traditional media – it will go only to friends of our firm. The purpose here is very simple – to put forth thoughts in the real estate world that are different, provocative, and challenging of accepted wisdom. Hopefully, nothing said here will be mainstream thinking.

You may be wondering how I am qualified to write on these topics since I am “just” a lawyer. However, I have an unusual place in the real estate world. As the Chairman of The Pure Play in Real Estate Law (one of the largest real estate law practices in NYC), I interact with an incredible number of real estate players. This ranges from small real estate shops with nothing but a gleam in their eyes, to some of the largest real estate institutions in the world, and everything in between. This gives me a unique and global perspective and allows me to act as an amateur philosopher in the real estate world. This has always been my hobby and it is what I love doing.

Regards,

Bruce Stachenfeld
a.k.a The Real Estate Philosopher™

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