Episodi
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Today’s guest is Ben Mizes, a real estate investor based out of St. Louis, Missouri, who is co-founder and CEO of Clever Real Estate. The first two words that came to mind as we wrapped up our conversation were inspiring and impressive. Ben shared in detail how he started with a limited capital base to make his first investment in residential property as a so-called house hack. He used an FHA loan, which is a federal assistance program from the Federal Housing Authority to help typically lower income buyers purchase homes with as little as 3.5% down. He then parlayed that initial investment into a real estate portfolio with dozens of units within a few short years. At the same time, he shared his parallel journey as an entrepreneur to found Clever Real Estate, a fast-growing company that is changing the structure of the industry. This was such a fun conversation and it’s possible to take away insights on multiple levels — from the mechanics of real estate investing to a street-level view of how the macro policies of recent years are playing out in real estate as an asset class to some of the structural shifts occurring in the industry. If you would like notes from today’s episode, please subscribe to our free newsletter. I hope you enjoy this conversation as much as I did. Feel free to email [email protected] with feedback.
2:05 An accidental path to real estate investing
3:45 House hacking defined: buy a multi-unit property with the goal of living in one unit for free while the rent from the other units covers all of your expenses.
5:01 Real estate investing 101: Ben’s first investment came after he developed a rental property calculator to estimate financial requirements and returns and scoured Zillow daily reviewing newly listed properties.. “I would model… pretty much any deal that was interesting that hit the market until it got to the point where it could hit the market and without using my tool I would think ‘is this going to be a good deal?’”
6:57 Getting lucky by making your own luck: “We ended up buying a building for $220,000 that was worth $285,000 the day we closed which was a great first investment, albeit a little bit lucky. But I attribute a lot of it to being aggressive in our search and being confident to take that first step because of what we built and the confidence from modeling all these deals.”
8:07 A practical, line-by-line how-to guide on how to develop financial assumptions when investing in real estate (e.g., down payment on purchase price; interest rate; gross monthly rent; electricity; water and sewer; garbage removal; insurance; taxes; vacancy rate; repairs and maintenance; capital expenditures; property management fees; leasing fees).
13:30 How Ben built knowledge about repair, maintenance, and capital expenditure costs despite not having any background or experience in real estate, construction, or property development: desk homework through books and podcasts (e.g., Bigger Pockets, Wheelbarrow Profits) combined with real world homework by casting a wide net for contractors on other properties he had considered. Used bids and meetings with 15+ contractors as a form of education.
16:40 Benefits of using FHA loan to finance purchase: low down payment of 3.5%, low credit score bar, and limited income history requirement.
17:38 Some best practices Ben adopted: personally knock on each tenant’s door to introduce himself and set mutual expectations on the service level he would provide, how to get in touch, and overall relationship; used cozy.co, a free tool to automate rent collection online.
20:20 How the first real estate investment played out: after a $7,000 initial cash outlay for a down payment, Ben became the owner of a 4-unit home that generated $2100 in monthly rental income against $1418 in monthly mortgage payments.
21:10 Expanding the real estate portfolio: flipping first property to fund a deal to purchase an 18-unit portfolio in St. Louis.
23:38 Real estate 201: a riskier investment in a home needing significant renovation.
24:10 Creative ways to source real estate deals: driving around looking for properties in disrepair and then contacting owners directly; using rental listings on Craigslist as a signal that the owner might be older and could be ready to get out; driving around town looking for physical for rent signs on properties that are not listed online as as signal that owners might be older and ready to retire.
27:40 Growth mindset as a new real estate investor buying first renovation project: “Our goal was not to make money. Our goal was to not lose money and to walk away breaking even. And we kind of viewed it as our MBA or our School of Hard Knocks education where if we could come out of our biggest project not having lost money, that was enough to be a win for us because we really wanted the education. So, with that type of goal in mind, this deal made sense… it gave us a bit of a margin of safety and confidence to chase after the deal hoping that we’d get an education and don’t lose money with the chance of actually having a really good return.”
29:35 School of Hard Knocks Lesson #1: habitability inspection to qualify for FHA loan can have stringent requirements.
34:13 School of Hard Knocks Lessons #2 & #3: properly scoping the job and vetting contractors before hiring them.
37:20 Putting in sweat equity when running short on funds during renovation: Ben finds himself renting “the biggest drill I’ve seen in my life” from Home Depot and using it to jackhammer holes in the home’s concrete floor.
38:22 How the renovation investment played out: $400,00 purchase using conventional mortgage with 20-25% down payment from a capital partner who got half the equity. $150,000 spent on renovations. $4500 monthly aggregate rent across three units and Ben lived in the fourth unit alongside his business partner. After the renovation, the building appraised at $690,000. They got a cash out FHA refinancing with a $550,000 mortgage, which allowed them to pay back their capital partner and recoup the entire renovation cost. They now own an income-generating building with none of their own capital tied up in it.
39:30 Securing commercial financing as an investor with limited track record. “Banks are really looking at the property manager because they’re the ones that make or break these deals. It’s not really about who owns it. So, the first question they asked was… is Chris going to be managing this for you?” When seeking commercial financing as a new investor, you should “bring to the bank a really good team to show… here’s the team that we’re going to use so that me, as an inexperienced investor, am not in a spot to ruin the whole deal.”
42:55 The long-term evolution: building an in-house property management company to reduce costs from misalignment of incentives with outsourced property management.
44:37 Risks to real estate portfolio: tenant default; exposure to neighborhood and regional decline due to portfolio concentration.
46:11 Launching Clever Real Estate as a technology-driven start-up changing how the industry works. Clever provides discounted listing services for property sellers with a national network of other 10,000 agents who will list a home for $3,000 or 1% of the sale price.
47:40 Why agents work with Clever. The most expensive part of being an agent is prospecting for clients. Clever takes this out by marketing more effectively than agents, allowing them to reduce their cost base and pass on the savingstot clients in the form of lower commissions. “The agents often look at it as if they are discounting their commission in exchange for getting new business.”
49:10 How Clever makes money: receives 25% of the fee that agent makesl.
52:10 Long-term potential sources of durable advantage for Clever: intellectual property that optimizes matching between sellers and agents as well as differentiated, high quality content that adds value for consumers.
55:55 Recommended reading
Inman for recent developments in real estate news Principles by Ray Dalio as a recent read that helped Ben think about what it takes to build an organization Bigger Pockets podcast Ben’s personal site is here and his writing on real estate investing and personal finance is on his terrific Medium pageNote: This podcast is for educational purposes only and nothing here constitutes a recommendation or offer.
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Today’s guest is Soo Chuen Tan, founder and President at Discerene Group, based in Stamford, Connecticut. Discerene is a private partnership, which invests globally on behalf of several long-term institutions and families. Soo Chuen is a long-term value investor and the depth of his commitment to his craft came through in our conversation. He’s able to seamlessly translate a high-level philosophy of investing into the practical hard work of executing fundamental securities research and the critical psychological aspect of being a contrarian who is at the same time constructive. We talked about Mega Study, a trailblazing South Korean online test prep company that saw its star fade when VC-fueled rivals emerged, but that Soo Chuen’s research revealed to have durable long-term value. If you would like notes from today’s episode, please subscribe to our free newsletter. I hope you enjoy this conversation as much as I did. Feel free to email [email protected] with feedback.
1:40 Journey to becoming an investor
3:05 Mega Study is the leading online high school KSAT test preparation company in South Korea, supplying the country’s “educational arms race” with a must-have service that has strong demand
7:00 Top teachers in Korea are pop stars with celebrity status and compensation
8:40 How Mega Study hit Soo Chuen’s radar screen: Looking for companies protected by structural barriers to entry (i.e., “economic moats”) at times when they are out of favor
10:00 Focusing on economic moats in evaluating the business as an investment. Mega Study has attractive economic characteristics as the owner of a self-reinforcing, two-sided platform
14:47 An opportunity to invest with belts and suspenders that provide a margin of safety: Venture-backed competitors ate into Mega Study’s business and the stock price declined below tangible book value (i.e., cash and value of property, plant, and equipment on its balance sheet, consisting primarily of real estate)
17:05 How Mega Study widened it economic moat: Adopting bundled pricing to transition from being a multi-homing network to a single-homing network
21:18 The psychology behind being a value investor taking a contrarian position. The hallmark of value investing is, in the words of Warren Buffett, “Being greedy when others are fearful and being fearful when others are greedy.” Four defining characteristics of value investors are:
Independent mindedness. “The best value investors we know tend to be cats, not dogs.… They are comfortable marching to the beat of their own drums and making up their own minds about things with little regard for conventional wisdom or a desire to fit in or please others. They deliberately invert propositions and test counterfactuals.” Natural skepticism while at the same time being constructive Using mean reverting mental models Deferred hedonism (i.e., patience)29:25 The Discerene research process: Combining “The Harvard Business School Approach” and “The Chicago School Approach”
34:40 Soo Chuen’s secret sauce: Compounding and building out a network
39:50 Conducting due diligence on hard assets
43:30 Areas of uncertainty and risk
45:20 Sizing the investment
47:40 Monitoring the investment
48:55 Recommended reading
On Korean education, Education Fever by Michael Seth On investing: Securities Analysis by Graham and Dodd; Common Stocks and Uncommon Profits by Phil Fisher; all of Warren Buffett’s letters; Seth Klarman’s Margin of Safety; various books by Michael Mauboussin; Howard Marks’ The Most Important Thing; Edward Chancellor’s Capital Account More broadly on economics, business, and finance: the work of John Keynes, Jean Tirole, John Sutton, Joseph Schumpeter, Hyman Minsky, Phil Rosenzweig, as well as current and former Harvard professors Michael Porter, David Yoffie, Clay Christensen, John Wells, Bob Merton, Andre Perold, Stuart Gilson, Peter Tufano, and so many others. David Hume on epistemology Among contemporary authors: Thinking Fast and Slow, by Daniel Kahneman; Triumphs of Experience, by George Vaillant; The Second Mountain by David Brooks.Note: This podcast is for educational purposes only and nothing here constitutes a recommendation or offer.
Note: For full disclosure, I have in the past served as a senior advisor to Discerene Group. I now have no commercial relationship with, and receive no financial benefits or compensation from, the firm.
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Episodi mancanti?
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Today’s guest is Richard Cook, co-founder and portfolio manager at Cook & Bynum based in Birmingham, Alabama. Richard is a pure value investor. Both the depth and breadth of his thinking shined through in our conversation. We talked about Arca, a Mexican Coca-Cola bottler that Richard evaluated for the multi-decade durability of its business. We had a great conversation in which Richard detailed a high-level structural analysis of Arca’s business while at the same time deploying a unique brand of shoe leather research bumping along the roads of Mexico to visit local shops in order to understand the company’s execution and positioning. If you would like notes from today’s episode, please subscribe to our free newsletter. I hope you enjoy this conversation as much as I did. Feel free to email [email protected] with feedback.
You can follow Cook & Bynum on their web site.
1:35 Path to becoming an investor: receiving 5 shares of 5 stocks as a third grade Christmas gift. Reading Roger Lowenstein’s, Buffett: The Making of An American Capitalist was a turning point.
6:00 Arca Continental is a Coca-Cola bottler based in Northern Mexico. Coca-Cola sells them syrup and they have an exclusive regional franchise to bottle and sell Coke.
8:00 How Arca Continental hit Richard’s radar screen.
10:25 Framework for evaluating businesses: circle of competence, business, people, and price.
10:30 Using old-fashioned shoe leather research. Richard drove from his home base in Birmingham, Alabama, to Mexico to visit small stores along back country dirt roads to evaluate the quality of Arca’s execution at its points of sale. “You want to understand why does the consumer choose your product and not someone else’s... and what does the company say those reasons are and do those match up.”
14:55 Identifying structural barriers to competition: Fragmentation of distribution.
22:18 Evaluating people — a critical aspect of emerging markets investing. “You usually have two sets of people. There’s management… there’s also the key shareholders, which is frequently a family or two or three and you have to triangulate on whether or not you want to be in business with this family.”
26:20 Investing in a less liquid name. “Most of the volume was going through a single broker … and we figured out that we needed to have a relationship with that broker…. You have to go find where the liquidity is.”
27:50 Monitoring areas of ongoing risk and uncertainty after making an initial investment: focusing on mega trends.
33:10 How Arca maintains its strength: investing in and strengthening the mom-and-pop store channel that distributes its Coke products.
38:24 Sizing the investment: Expected return divided by risk, which Richard defines as the how wide the range of outcomes relative to expectations may be. His write-up on avoiding losers captures Richard’s unique approach to thinking about risk. He also has a terrific write-up on the Kelly Criterion, which was originally used in information theory and has served as a guide for Richard’s focus on maximizing geometric means rather than arithmetic means in investment decisions. The original Kelly paper is here and William Poundstone’s Fortune’s Formula is a history of John Kelly and Claude Shannon’s efforts at Bell Labs in the 1950s developing his formula.
45:44 Recommended reading
Robert Massie’s Peter the Great for providing perspective on emerging markets across history. CV Wedgwood’s The Thirty Years War for providing perspective on the impact that a major reduction in the cost of communication can have on society. Anything by Peter Kaufman (there are a lot of YouTube videos). One of his insights is that if a business optimizes toward win-win solutions, that goes a long way toward decreasing risk and increasing durability: “All the people that interact with this business, are they winning? If they are, then that’s a lot more durable. You can say a lot more about what the profitability and durability of that business is 10, 15, 30 years from now.“ Richard was humble in not mentioning the Cook & Bynum web site. It contains a terrific Bookshelf section with recommended books as well as scores of fantastic “C&B Notes” covering a broad range of topics in investing and beyond.Note: This podcast is for educational purposes only and nothing here constitutes a recommendation or offer.
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Today’s guest is Soren Aandahl, founder and chief investment officer at Blue Orca Capital, based in Austin, Texas. Soren is a short activist investor who specializes in deep dive due diligence. He’s a recognized star in the short activist universe and was previously CIO at Glaucus Investments, which was named the 2016 Short Activist of the Year by Activist Insight Magazine. He’s incredibly thoughtful about his craft as an investor and his passion for short activism shined through in our conversation. We talked about the colorful tale of Quintis, a one-time high-flying Australian company that his research revealed to be largely worthless. If you would like notes from today’s episode, please subscribe to our free newsletter. I hope you enjoy this conversation as much as I did and feel free to email [email protected] with feedback.
You can follow Blue Orca Capital on their web site and Twitter.
2:10 Soren’s journey to becoming an investor: An aspiring federal prosecutor turned activist short seller.
4:29 Quintis is an Australia-based manager of commercial Indian sandalwood plantations. Their business requires planting trees and cultivating them for 15-20 years before harvesting and generating cash.
6:28 Quintis hit Soren’s radar screen after they sued a sell side analyst who had written a private note to his clients advising them not to invest in the company. “As a general rule, as a short seller, you look in the world and you say that great companies don’t really care if you criticize them. They know that in the long run that they’re right. It just kind of brushes off their shoulder. But companies with something to hide get incredibly prickly and defensive when you criticize them or when anyone says something that contradicts their world view…. Our spider senses just went up right away and we said these guys have something to hide.”
8:42 Digging into a potential short selling opportunity: unpacking disclosures and financial statements. Red flags included deploying an unusual financial structure for fundraising, non-cash profits based on revaluations of assets, and a high amount of debt (i.e., almost half of EBITDA went to servicing debt each year).
13:42 The first big break: Comparing financials against what Quintis marketing materials told investors. Quintis was promising investors dividends after two years and full payback after seven years even though their trees 15-20 years to mature and generate revenue. “That immediately jumped out to us as like a hallmark of Ponzi-like behavior.” Fun fact: Ponzi schemes are named after Charles Ponzi, a 1920s-era swindler based in Boston whose history Mitchel Zuckoff details in the book Ponzi’s Scheme.
17:17 An analogy to Enron where “The problem wasn’t necessarily the mark to market accounting, it was the abuse of the market to market accounting…. what Jim Chanos called mark to model accounting…. Enron’s scam was taking incredibly difficult to value assets for which there was not only no determinable spot price but they took 15-20 years to come to fruition, recognizing the revenue upfront but also revaluing those assets every year to get non-cash profits.” Quintis likewise was generating non-cash paper profits based on increases in the value of its maturing sandalwood trees where it had wide discretion in the value that it attributed to these assets.
20:50 The “detective moment.” Quintis set the value that it attributed to its assets by relying on price projections from a broker who was an undisclosed stock promoter for their company.
24:56 Soren’s investing superpower: “There is no substitute for doing the hard work and doing the grind…. The best short ideas are the ones that in retrospect look so obvious…. You earn the luck of finding that… by grinding through the filings and the footnotes and chasing down 30 leads before the 31st one is your eureka moment.”
26:21 Discovering that Quintis bid up prices for sandalwood at occasional auctions, which had the effect of bolstering the value that it could attribute to its sandalwood tree assets.
30:20 “The final element”: tracking down the primary customer that Quintis claimed as generating over half of its sales and learning that they appeared to be largely a fake company.
38:50 A primer on how short selling works. “You’re selling the stock today with the hope that you will buy it back later at a lower price because it will decline…. you don’t have the shares, you receive the cash [for selling the shares], but you need to pay interest because you need to borrow them from someone who has the shares.... In shorting you call that negative rebate. Think of it as the interest rate that you pay to borrow the shares while you have your position…. The interest rate fluctuates wildly and there’s no real centralized market for the borrow fee… it’s set by the brokers…. The hard part about shorting is that while your position is on, you are paying the interest to borrow the shares and so that’s going to eat into your eventual economic profits should you generate any.”
41:00 How Soren thought about taking a public activist position.
53:08 Considerations when sizing short position: borrow availability and short interest as a percentage of float (i.e., whether it is a “crowded” short).
54:14 Exiting the short. “Oftentimes as investors, the easier decision is ‘I know this is the time to enter into this investment’ and… the much harder decision is ‘when do I exit.’”
55:38 Recommended reading
The Smartest Guys in the Room by Bethany McLean on the Enron scandal. “There really is nothing different… a lot of the things we’ve seen, especially in the markets, we’ve seen before” and this classic provides insight not only on how “these schemes work, but how they’re perpetuated and how they convince so many people” Muddy Waters Research posts by Carson Block (web and Twitter) Wolfpack Research posts by Dan David (web and Twitter) No Mercy / No Malice newsletter by Scott Galloway Economist for breadth and “expanding your touchpoints into areas you wouldn’t have even considered” Soren was humble in not mentioning his own short reports, but there are dozens available on Blue Orca’s web site and they make for terrific reading. The Quintis report is here.
Note: This podcast is for educational purposes only and nothing here constitutes a recommendation or offer.
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