A couple of weeks ago, I wrote an article on Warren Buffett (Trades, Portfolio) and real estate. In the article, I discussed Buffett's real estate investments over the years and speculated as to why he has never shown as much interest in property as other wealthy individuals.
In this article, we'll go over some historical comments that either the Oracle of Omaha or his right-hand man, Charlie Munger (Trades, Portfolio, have made about the asset class.
Buffett on real estate
At the 1996 Berkshire Hathaway (BRK.A, Financial) (BRK.B, Financial) annual meeting of shareholders, Buffett briefly touched on this topic. Responding to a shareholder who wanted to know more about a small personal investment he made in a real estate business, Buffett explained why he decided to take a position in the stock before going on to give some more insight into why Berkshire hadn't invested much money in real estate in the past.
Explaining why he decided to buy a property stock for his personal portfolio, Buffett said:
"So every now and then, some little thing happens to hit the radar screen that is too small, really, for Berkshire. And I’d bought a hundred shares of that company back when I — it’s called Property Capital Trust — I’d bought 100 shares of that back when we owned NHP, which had done a couple of deals with them. So I — my policy of reading every annual report insight that can further my knowledge about anything, I bought 100 shares. And then I happened to see a year or so ago, where they said they were going to liquidate. So having some money around, I bought that. But it’s not based on any feeling about the real estate business, any sophisticated analysis of the company, or anything else. It’s a minor personal investment."
Interestingly, the Oracle of Omaha then went on to claim that he has "no insights whatsoever" when it comes to investing in real estate. That seems to provide some explanation as to why Buffett and Berkshire have never really had a lot of money invested in real estate or real estate investments.
He also went on to add that Berkshire had struggled to find attractive opportunities in the sector, and that was preventing the organization from making any big investments. Specifically, Buffett declared:
"If we’d started a little earlier, there might’ve been a lot more things. But we started a little late. So we’re doing nothing now. But we listen to things, occasionally. But we’re looking. We’re basically looking for big things at Berkshire. And we haven’t found anything in real estate in a long time. And we may never. But who can tell? I mean, we’ve got our oar in the water. And the couple things we’re in are working out fine. But they’re not significant relative to Berkshire’s size."
Based on these comments, it seems that Buffett is quite happy to invest in the real estate sector, but only if he can find opportunities that are cheap enough to compensate him for his lack of unique insight into this asset class.
That contrasts with companies that might fall in the consumer goods or banking sectors, which Buffett knows and understands better. Here he might be willing to pay a higher price for a business just because he knows it is a good business and understand the key factors that make it such an impressive enterprise. He is unable to do the same with real estate because he lacks unique insight.
Once again, this is a valuable lesson from Buffett that all investors can learn from. If you don't understand an asset class, it's best to stay away and not just invest because everyone else is.
Disclosure: The author owns shares in Berkshire Hathaway.
Read more here:
- Charlie Munger: Sometimes It's Better to Raise Prices
- Searching for Advice in a Crisis: Lessons From Seth Klarman​
- Learning From Warren Buffett's Early Investment Strategy​
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