Betas and definition of risk:

Although I disagree with the use of betas to identify the level of risk an investment carries, it is understandable. At bottom using betas as a gauge of risk says your’ definition of risk is volatility. This fits with the reasoning that the more uncertain a future benefit is the more risk it carries and the more it should be discounted today, which is correct. The issue becomes whether variance or volatility and uncertainty are the same thing. The answer is inseparable from your investment time horizon. If for example you had a strong conviction that the competitive strengths of an investment would produce a very good return over the next 10 years, but there could very well be a terrible two or three years during that time (and maybe that’s the case at time of purchase which makes the price appealing), if your horizon was 10 years, you don’t care about the volatility, because you feel there is a high degree of certainty that it will perform well over your ownership period. If, however, your time window was 6 months, volatility would more equate to uncertainty. This concept has similarities to the concept of “probability as a limit” or “relative frequency”. The probability of rolling a 3 on a six sided die is 1 in 6 or 16.6%. It is however possible to roll a die 20 times and not get a 3 once. But eventually, as more and more rolls are made the probability of 1 in 6 will take affect. If the time horizon was 3 rolls, the volatility would dictate your level of certainty, however if the time horizon was 200 rolls, the degree of certainty would be less affected by variance.

Real estate is local. This means that the national trend can be doing one thing while certain cities are doing the opposite. Multifamily sector health is largely driven by job growth and some cities are better at attracting jobs than others. This is the dynamic behind a recent article in The Economist title: ” The Recovery: Still Patchy” (click here for the full article: http://www.economist.com/node/17906059?story_id=17906059&CFID=153908198&CFTOKEN=72312851 )

One of the elements that we look for in a market during the initial high level review is the education of the workforce. This is referenced in the Economist article stating that those cities with a higher education workforce have lower unemployment since college educated workers have lost fewer jobs that non-college educated workers. This is also appealing to potential new employers who may be looking for a more advantageous place to relocate their business or start their business since it gives them a better qualified labor pool. A good example of this is Little Rock, AR where we have a 126 unit property under contract to purchase. Little Rock has 38.2%  of its population (over the age of 25) with a bachelor’s degree whereas the average for the US is 27.5% and Little Rock’s unemployment rate is 6.6% versus the national average of 9.4%.

Wise location decisions are important to successful real estate investments in both good economies and bad…so don’t forget that when things are recovering and looking rosy!

By Greg Picone:

While betting against the US economy has never proved to be a wise move, there is legitimate concern over the current economic policies that we are using, namely increasing the money supply as much as we have and continue to. While I don’t believe that our currency will collapse, these are good reasons to consider owning hard assets that will do better then paper money in inflationary times. Needs-based commercial real estate (apartments) is one of those hard assets that should do well against inflation and is able to be valued based on it’s net operating income.

Here is an interesting snapshot of 5 failed currencies in the recent past:

http://www.investopedia.com/slide-show/5-failed-currencies-why-they-crashed?partner=basics12

Are you an “Expert”? Be careful!…

The spill in the gulf could wind up being the biggest in U.S. history. Now there is a website with a live feed where you can watch the oil come shooting out of it’s casing and into the ocean. You can just watch millions of dollars of oil being lost while it’s simultaneously causing millions of dollars in damage.

The nature of sitting back and watching it happen live makes you ask the question why can’t it be stopped. In thinking about this, there are two basic reasons: 1- inaccessibility and 2- foreign environment. Simple but true and this has a lot to do with building wealth…

1-      Inaccessibility. The break is about 1 mile below the ocean’s surface. This is a very challenging area. People can’t just dive down there and mend the break. Pressures at that depth would be over 2,000 pounds per sq. in. and would crush a human.  This makes for a place that’s difficult to get to. This is also the case with certain investments, they are inaccessible to those who have not specialized in that specific arena. Everyone has their niche, their focus, their own business, etc. While you can’t know everything about everything, you can know others whose expertise you can leverage and benefit from. This opens up possible investment opportunities that would otherwise be closed.

2-      Foreign Environment. This level of the ocean in largely an unknown. You may disagree, but this is why the attempt to correct the problem by placing an oil catching dome above the leak failed. They placed the dome and there was an unexpected build up of icy gas hydrates that prevented a seal. It was unexpected because the environment is largely unfamiliar. This also is instructional in wealth building. Straying outside of your area of understanding can lead to undesirable results. Real estate is no different. It’s actually a fairly illiquid investment, which does not lend itself to incompetence. We’ve watched those who did not gain the proper expertise and give their investments the attention they needed, wind up becoming the motivated sellers that provide opportunities to those who are prepared.

Much like the oil spill, inability to act on an opportunity equals value slipping away. The remedy is to engage those who you can leverage…

Is inflation coming? I think the better question is can you increase the money supply as much as we have and as fast as we have and not have inflation.

Recently an article was published by investopedia and the author suggested three ways to protect yourself against inflation. They were:
1. Invest in stocks
2. Invest in real estate (he referring specifically to a primary residence)
3. Invest in yourself
The article was fairly general, but worth a few minutes: http://www.investopedia.com/articles/basics/10/protect-yourself-from-inflation.asp?partner=basics4

Inflation, on a personal level, is ok, as long as your assets and income are increasing faster than your liabilities. I call this fixing vs. floating…
If you’ve ever gone clamming or hunting for muscles in the mud flats at low tide, you know that you want to be careful not to be alone and get stuck in the mud when the tide starts coming in. Let’s make believe that two guys had to stay out there overnight. One guy was standing in a little rowboat on the mud and right next to him was another guy, without a boat, stuck in mud up to his shins. These guys have a good time carrying on conversation and laughing for several hours, until the tide starting coming back in. The water didn’t bother the first guy in the boat, he just simply kept rising along with it. The other guy, however, well, it was bad news for him!
This is a picture story of inflation. The key is to pile your assets and income in the boat so they rise with the tide, and let you liabilities get stuck in the mud. This is why seniors get hurt so much during inflationary periods, there income is fixed in the mud and their liabilities (cost of living) is floating up on the boat. Float your assets and fix your liabilities.

One asset that floats well is real estate. An asset that does not float well is savings. I particularly like that the author of the article I mentioned said that investing in yourself in an important inflation hedge. This is true because if you don’t gain more understanding, you’ll be prone to believe that savings is an investment strategy and be like the 2nd guy that was having a good time until the water quietly reached his nose.

Can you imagine what your life would be like if there were no problems? Here are some of the ways it would look:

• You would be broke
• You would under utilized
• You would be unfulfilled

Are you surprised? Do you completely disagree with me because you feel that problems make your life difficult? I’ll challenge you to change your perspective, how you define a problem. This is my definition of “problem”:

1. The opportunity to get better and advance
2. The opportunity to add value

I said above that if your life was problem free you’d be broke.  It’s true. Without knowing you or what you do for a living I can say this with surety, because the only reason that you get paid is because you solve a problem. If you are a flight attendant, you get paid because the airline had a problem—they have thousands of passengers who need direction and assistance to have a good, orderly experience with their company. If you’re a doctor you get paid because people have a problem, they’re sick and need advice, a surgery, or medicine. If you’re a cab drive you get paid because someone had a problem, they didn’t have a car or someone to give them a ride to where they need to go…

You are designed to solve problems. If there were no problems for you to provide the solution to, you would be completely unfulfilled and unsatisfied. Stop running away from problems and start to realize that they provide you with a platform to show your potential, to add value.

Other people’s problems are your opportunity to add value to them and get paid. Your problems are your opportunity to add value to yourself and advance. In academic vernacular, problems are called “tests”. What happens when you pass a test, you can move to the next level!

Don’t be average. Average people live their lives trying to minimize their exposure to problems. Be uncommon, embrace problems, because they are opportunities to develop and shine. The more value you can add (the bigger the problem) the more you get paid. Be a problem junkie!