Are You a CRE Value Investor?

Value investing is typically associated with successful stock and bond investors like Warren Buffett and Charlie Munger of Berkshire Hathaway, Seth Klarman of Baupost, Chris Browne of Tweedy Browne, Ben Graham, the Godfather of value investing and mentor to Warren Buffett, Peter Lynch of Fidelity and Bill Ruane of Sequoia Fund. Value investors seek to buy common stocks at discounts to the intrinsic value of at least 50%-60% and use rigorous fundamental analysis to discover these discounted gems. Value investing is a very difficult business because, when the stock market is richly valued, it’s hard to find big discounts and these investors don’t follow the herd on Wall Street and the institutional investor mentality. They have to take contrarian investment positions, and this can be problematic in a rising stock market. In many cases, the value stocks they buy at a discounted value must be held for years for the true intrinsic value to be realized.

Two of the best books on value investing was written by Seth Klarman, Founder and Principal of The Baupost Group titled, “Margin of Safety” and Tren Griffin, a former private equity investor titled, “Charlie Munger, the Complete Investor”. The Margin of Safety book has some great comments on Wall Street. The books say that; “Wall Street works against investors because they make their money on transaction volume, upfront fees, underwritings over secondary market transactions and they have a short-term, bullish biased focus and not on doing good deals. The Munger book also has some great comments on company moats. A moat is a company’s competitive advantage to protect its market share and profits and most value investors seek companies that have one or more moats. There are five types of corporate moats that include; supply-side economies of scale and scope (low-cost producers), demand-side economies of scale (network effects), a brand or franchise, regulation protection and patents and intellectual property. Many of these same value investing attributes can be applied to the CRE industry.