Two Lessons from Charlie Munger

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Brian D. Milovich

Managing Principal, Calvera Partners

Let me start by saying that I’m not a Berkshire Hathaway or Warren Buffett/Charlie Munger evangelist. However, there is no denying their investing prowess over numerous decades all while owning seemingly boring businesses such as See’s Candies, GEICO, and BNSF Railway. The results have been remarkable, and they have demonstrated that conviction and persistence are worth more than riding temporary market momentum or investing in the hottest stock of the day. The recent death of Charlie Munger has brought the relationship between him and Warren Buffett back to the forefront. Two themes from a recent Wall Street Journal caught my attention because I think they’re applicable to real estate and what we do at Calvera.

“Buy wonderful businesses at fair prices” – Warren Buffett

Warren Buffett wrote in 2015, “This purchase [See’s Candies] ended my pursuit of ‘cigar-butt’ investments—mediocre companies at ‘bargain’ prices—and set me in pursuit of splendid businesses selling at [reasonable] prices.” Buffet’s pivot was heavily influenced by Charlie Munger, who pushed Buffett to change his perspective on value investing. According to the article, “Munger [instead] focused on great businesses at acceptable prices, reckoning that their ability to produce cash in the future would more than compensate for paying a premium price upfront.”

In real estate, it can be tempting to buy the cheapest property, one with the highest cap rate, or with the lowest price per unit. If this property is in a great neighborhood, this is a great strategy to deploy. Often, the cheapest properties or those with the largest bargains come with the biggest headaches. In 2011, we were desperately looking for a property to buy to start Calvera Partners. We purchased a 7-unit apartment property in San Jose, CA at a very low price. It became an even lower price after our due diligence. What we didn’t appreciate at the time was that it was in a terrible neighborhood and had some difficult and aggressive tenants. Our property manager’s car was keyed, the building was tagged with threats, and one tenant destroyed his unit on purpose. We sold the property 12 months later for a significant gain after we cleaned up the property, inside and out. After that experience, we said life is too short for us as hands-on operators to invest in those type of properties.

In the beginning, we had been looking for those bargain priced properties. We then transitioned to mostly buying older properties at a bargain in working class neighborhoods. Today, we have the opportunity to buy better real estate at bargain prices because we have a long-term view in the Calvera Income and Growth Fund. The bargain pricing won’t last forever, and we’ll make peace with acceptable pricing in a more rational investment market. Better located real estate stays fully occupied. Newer buildings (built in the last 20 years) have less obsolescence risk and fewer recurring maintenance issues, making them cheaper to operate. In the right market, these properties can experience out-sized rent growth, further improving already solid revenue. These are difficult traits to underwrite in an investment model, and the price per unit won’t be the lowest in the submarket, but these types of properties have the potential to outperform in the long-term, much like Charlie Munger suggests about great companies.

“He [Charlie Munger] often said that the key to investing success was doing nothing for years, even decades, waiting to buy with ‘aggression’ when bargains finally materialized.”

This theme speaks to conviction and persistence. Great investors need to fully believe in their investment thesis and wait patiently to deploy considerable capital at the opportune time. The only apartment property during the Covid-boom that made sense to us was our purchase in Carrboro, NC. At the time, the Chapel Hill/Carrboro submarket was still dead from pandemic restrictions while the greater Triangle area was already staging a comeback. We were able to get ahead of the curve. Additionally, we had to assume a 4%, fixed-rate, long-term loan when everybody else wanted short-term, floating-rate, 3% debt. Because of that, we got a big discount on price and a great loan. Nothing else made sense for the past 3 years until we purchased a property in Fort Worth, TX in late 2023. Finally, the market was resetting, the seller had distress in their portfolio, and we picked up an asset in a prime market at a major discount to its competitors.

The Calvera Income and Growth Fund was created during this period of excess as a way to capitalize on the eventual distress that we saw coming. The time is now to buy properties with aggression. There is going to be a window of opportunity to purchase quality apartment properties in top markets at terrific prices. For a long-term fund focused on cash flow there could be no better time to start accumulating assets. The window of opportunity has opened, and how long it remains open is anyone’s guess. We sense considerable fear in the market—less over interest rates, and more over operations in the short-term. Rents are soft, and operating expenses are increasing. It’s keeping both buyers and sellers on the sidelines. Once sellers’ hands are forced to sell, likely in greater numbers in 2024, we will be ready to acquire those properties and want to make sure you don’t miss this opportunity either.

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