Some advice for new graduates

Recently, have found myself giving advice to some recent college graduates beginning their careers in business.

Figured I’d share here, since plenty of my readers are in the early stages of their careers and this is the advice I wish someone had given me.

As always, my advice is worth what you’re paying for it.

Here is what I recommend:
  1. Immediately begin reading the Wall Street Journal (focus on the “Business” and “Markets” sections)
  2. If you’re in LA, begin reading the Los Angeles Business Journal
  3. Go to the Berkshire Hathaway website and start reading Warren Buffett’s annual shareholder letters, beginning with the first one in 1965(?) and continuing through this year’s letter. This is like a free, very high quality education in insurance, management, and corporate finance.
  4. Pick out 4-5 public companies in the industry you’re looking to get into (ideally, ones headquartered in the city in which you want to live) and go read their most recent annual reports, paying particular attention to the CEO’s letter. You will quickly get a sense for the challenges and opportunities facing the industry.
  5. Using the annual reports, the WSJ and (in LA) the LABJ, pick out 5-10 leaders in your chosen industry, cold-email them, and ask you if can come into their offices at any time that works for them for a 30 minute conversation. If any agree, do a TON of preparation for the meeting – read everything you can find on the person, their company, their industry, etc. Prepare a list of really good questions and memorize it. Go in there and impress the hell out of them.

If you do the above, you will be about a million times more prepared than your competitors. The rest is up to you.

Why rich people should ignore conventional retirement advice

If you have a lot of capital, you should mostly ignore conventional retirement advice.

Your standard retirement planner assumes that you are going to build up a portfolio of assets over your working life, then liquidate that portfolio to fund your retirement.

Because you will need to begin to liquidate at a certain date (say, when you turn 65), you are vulnerable to big swings in the value of your portfolio as you near that target date. To avoid being poor in retirement, the thinking goes, you need to be very concerned with maximizing the value of your portfolio at your target retirement date. Since equity (stock) returns are supposedly more volatile than bonds, advisors tell you to start selling stock and buying bonds as you get closer to retirement age.

So far, so good. But this advice is really targeted at people who aren’t going to end up with a large enough pile of assets to live off the income produced by the assets, and therefore need to liquidate.

What if you have significant assets?

In that scenario, the goal is not to maximize liquidation price at a given time… in fact, that’s exactly the opposite of what you’re trying to do.  You want to pass along as much wealth as possible to the next generation (and for that generation, in turn, to pass the wealth onto the next).

If you’re not going to think in terms of liquidating the portfolio, your whole outlook on investing changes. You don’t care very much about the volatility of the prices of assets you hold… after all, you’re not a seller (unless the market offers truly insane prices!).

Instead of thinking about maximizing price at any particular time, you should focus on:

  1. Maximizing the amount of earning power over which your portfolio gives you (and your heirs) a claim; while
  2. Assuring that an acceptable portion of that earning power is delivered to you in the form of cash distributions (because you need money upon which to live)

Two types of potential investors

When I speak with potential capital providers, I hear two very different ways of thinking about investing in our projects.

The first group of investors thinks about things in terms of a return target. These investors trust us and like what we do. They are concerned about where we are in the real estate cycle (probably late) and therefore want to err on the side of caution. They therefore put in place a target unlevered yield target that’s on the high end and wait for us to bring them deals that clear the target… (eg, “We’ll do a 6.75% unlevered, if you can find one.”)

Implicit in the above is that these investors are willing to do no deals, if we can’t find ones that hit the threshold. Either they have other investment opportunities that are more compelling or, more likely (because everything is expensive right now), they are content to build up cash, because they think there will be better opportunities coming along shortly.

The second group of investors takes a different tac. They say, effectively: “We want to fund the best deals you can find.” In other words, they have already made the decision to allocate a certain portion of their available cash to our kind of multifamily deals AND they trust us to find the smartest deals for them. Obviously, for these investors, doing no deals is not an option… they’re hiring us to put out money and they want it put out.

Which type of investor is “right”? Well, it depends on what happens going forward.

If we’re on the verge of a correction where prices will drop materially, then the first type of investor will have been right. They sacrificed some current yield in order to keep dry powder to buy things when they get cheaper.

If, on the other hand, we’re in for several more years of growth, then the investors who move forward now will have been better off.

Anyone who tells you he knows, with certainty, when we’ll have a market correction is either stupid or lying. So I think whether you fall into the first or second camp mainly comes down to whether you are fundamentally an optimist or a pessimist.

The most important variable

In a recent email to investors in Adaptive Realty Fund 4, I wrote:

“In our business, there are three types of variables (of varying degrees of magnitude):
  1. Things we can’t control…
  2. Things we can control…
  3. Things over which we have some, but not total, control…”

Spent the rest of the letter discussing the most important “type 3” variable.

Today, I want to talk about the most important “type 2” variable: price.


Repositioning buildings is inherently complicated. Lots of things can go wrong and some of them are totally beyond your control (see above).

But you can control the price you pay for a building.

Pay too much, and pretty much everything has to go right.

Give yourself a nice margin of safety, and you can survive some bad breaks and/or bad execution.

The trick is to be willing to keep your bat on your shoulder, watching pitch after pitch go by, until you find one you can really drive.

Down on emotional support animals

In today’s edition of Property Management Chronicles:

  • Had two tenants in a unit
  • They applied with no pets
  • Decent-to-good credit, real jobs, etc.
  • After approving them, they showed us paperwork for their three emotional support pitbulls
  • No wanting to get in a huge fight, we let them in
  • For the entire length of their tenancy, they were a nightmare – late rent, other tenants complaining, keeping maintenance personnel from entering their unit, etc.
  • They finally moved out, and their apartment is a disaster – not surprisingly, their pitbulls chewed up the place

Will we ever get made whole? HAHAHAHAHAHAHA. I’m going to sue them, but the likelihood of collecting is pretty low.

Can I prevent this kind of thing from happening again? Not really. California law allows anyone with a doctor’s note to have an “emotional support animal”, and there’s nothing we, or any other landlord, can do to prevent a documented animal from living in our apartments.