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Circle of Competence Issue #94


"The dead outnumber the living 14-to-1, and we ignore the accumulated experience of such a huge majority of mankind at our peril."

- Niall Ferguson


A few thoughts on the Raleigh-Durham-Chapel Hill Triangle area in North Carolina

Recently someone asked me to write about my new job in commercial real estate development, but I thought that instead it would be far more interesting for me to answer the questions "why real estate and why the Triangle?"

For starters, if I am going to invest in a piece of real estate, a stock, or a company, I like to make sure that it has a few things going for it. As I've written before, it has to be within my circle of competence. Coming out of a career in professional baseball, I felt reasonably knowledgeable about finance, technology, and real estate, but felt that my interests were by far the highest in real estate finance and investments. Circle of competence, check.

Next, in assessing various industries, I tried to look at the decision like an investment - a piece of real estate, a stock, or private company. After I know for certain that a particular opportunity is within my circle of competence, I like to assess the downside risk. Contrary to popular opinion, commercial real estate was in fact NOT at the heart of the last financial meltdown. That honor belongs to excessive leverage - real estate was merely the vehicle to which that leverage was applied. The beauty about real estate is that it is TANGIBLE and lends itself to leverage in a wonderful way that most other asset classes don't. But with leverage, the sword cuts both ways. Like Buffett says - bankers give you their umbrella on a sunny day and ask for it back on a rainy one. I once read that Seth Klarman only uses 50% leverage in Baupost's real estate holdings. Conservative leverage allows for a cushion during the entire economic cycle from expansion to the inevitable contraction. In terms of upside, one can profit from an investment in real estate in multiple ways: recurring cash flow, appreciation of the underlying asset, and building up equity through debt payments. The downside of a well-located piece of real estate that is conservatively financed is small and the upside typically takes care of itself. Just ask Bruce Flatt from Brookfield Asset Management. Downside protection, check.

And last of all, when considering job location, I began first by look