Circle Of Competence Issue #24

August 12, 2018

Quote of the week: "People are frugal in guarding their personal property; but as soon as it comes to squandering time they are most wasteful of the one thing in which it is right to be stingy." - Seneca

 

 

FOOD FOR THOUGHT

 

This week I had the pleasure of speaking with Nathan Reid, a private real estate syndicator/investor and hedge fund manager (Ironwood Fund), from Phoenix, AZ. He is a devout follower of Warren Buffett and Charlie Munger and has organized his real estate funds and private partnership with their principles in mind. I’d like to share a few nuggets from our conversation below. 

1. Focus your efforts. Early in Nathan’s career, he was running about 4 businesses simultaneously when he realized that he was much better off focusing on the highest return on time and ultimately money - his real estate and hedge fund (stock/equity) partnerships! Focus your efforts on the activities with the highest return on time invested.

2. Know your Circle of Competence.  Nathan told me during our conversation that he typically can say no to a multifamily listing in about 10 seconds if it does not fit what he is looking for. You should know your circle of competence so well (in Nathan’s case multifamily) that you can avoid a bad investment in less than 10 seconds. Buffett is famous for doing as much. 

3. Let your word be final. Nathan recommended never to retrade (a term for agreeing on a sales price for a piece of property but renegotiating when under contract). He isn’t worried about nickeling and diming an investor and broker because he wants to be easy to do business with in the long run - and because he knows this is a good way to attract follow up deals!

4. Align incentives. Make sure your incentives are always aligned with people that you are doing business with. Nathan likes to bring others like brokers and contractors into his deals because this aligns their incentives with his - finding good deals and doing good work! He also does not take a management fee on assets under management in his hedge fund but rather only makes a percentage of profits after a specific hurdle rate of return is met. This is the same structure that Buffett & Munger used in their early partnerships to ensure their interests were aligned with their clients - making money!

Thanks again to Nathan for taking the time to share his wisdom. I’m hoping to have more investor chats soon - please send someone along who you think might be interested!

 

 

DEPARTMENT OF GENERAL FINANCE

 

- Is Tesla going private?

 

- Aswath Damodaran on Tesla going private

 

- John Huber's (Saber Capital Management) thoughts on China & circle of competence

 

- A new mental model for investing in low cost producers ($AMZN, $COST)

 

- Warren Buffett's 1985 interview with Adam Smith revisited

 

- Stanley Druckenmiller's speech at the Manhattan Institute's Alexander Hamilton Awards ceremony

 

- Natural Maniacs (Morgan Housel, Collaborative Fund)

 

- Investing in the age of disruption (Ensemble Capital Management, Todd Wenning, CFA)

 

- Peloton (networked cycling company) is valued at $4.15B 

 

- Fiscal death spiral in Chicago could hurt real estate values

 

- How Jack Ma's Alipay is shaking up the Chinese banking system

 

 

DEPARTMENT OF TECHNOLOGY

 

- Why the next Silicon Valley may be outside the US

 

- Apple's road to a trillion dollar company

 

- Can humans control a robotic arm with their minds?

 

- Spending on Twitch shows big league esports have arrived

 

- Stephen Hays on how to invest in eSports

 

- By 2022, Goldman thinks eSports will be as big as the NFL

 

- MoviePass keeps plan at $10 but limits subscribers to 3 movies/month

 

- The power user curve - understanding a product's most engaged users (Andreessen Horowitz)

 

- Is blockchain overhyped?

 

 

DEPARTMENT OF PODCASTS

 

- Steve Glickman w/ Meb Faber on Opportunity Zones (and paying 0% capital gains taxes)

 

- The Investors Podcast with Bryan Birsic on Renewable Energy Investing

 

- Patrick O'shaughnessy with Cathie Wood on investing in innovation

 

- BiggerPockets with Neal Collins on building a property investment, management, and brokerage business all in one

 

 

DEPARTMENT OF LETTERS

 

- Bonhoeffer Capital Management Q2 letter & $KT investment thesis

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