Learning, some more, from Buffett


Am in the process of going through Carol Loomis’ Tap Dancing to Work: Warren Buffett on Practically Everything 1966-2013, which is spectacular.

Have taken away two nuggets which are relevant to our business, one great and one not-so-great.

The first comes in the form of a comment Buffett made to a bunch of MBA students, (I think) in the 1980s. To paraphrase: The government does not tax unrealized capital gains, which means you can compound the value of your investments by holding long term.

Obviously, I have placed a major, career-defining bet on the power of long-term holding to create net worth for myself and my investors. But it can be hard sometimes to stay the course, when so many of our competitors are making “easy” money flipping deals. So it’s nice to be reminded that Buffett made the same bet (and did pretty well with it).

The second, not-so-great insight (from our perspective) concerns the use of retained earnings. With the help of Charley Munger, Buffett realized (sometime in the 1970s, I think) that, so long as you have a good management team, it’s actually a good thing when businesses retain earnings, instead of distributing them out to shareholders in the form of dividends.

Why? Because retained earnings are a signal that management has found opportunities to re-invest in growing the business. So long as those investments actually do drive real, profitable growth, shareholders should be thrilled.

Why is this bad for us? Real estate doesn’t really offer the same opportunity to reinvest to drive growth. After the initial, value-add strategy is executed, real earnings growth is fundamentally determined by the rental market you’re in, not by anything you can do.

Luckily, Los Angeles rents and values have grown faster than inflation for a very long time, and look set to continue to do so. So I feel good about what we own now. But it sure would be nice to have a lever to use to accelerate earnings growth in the existing portfolio faster than whatever our market can provide.