Just Like Warren Buffett – Acting on Value
- August 15, 2009
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I was listening to one of the 24×7 financial news channels the other day in my car, and within a fifteen minute time span, I heard an analyst predict a 30% rise in the Dow by April, and then a different analyst predict a new market bottom by summer. A few moments later in the third interview, another market insider helped to really clarify things – announcing the possibility of a recession! My business partner and I have had a blast the last 3 months following the election, the financial markets, and listening to the ‘experts’ in the media discuss their predictions of what we already know. It’s kind of difficult for us to take them too seriously when you can’t get agreement from the ‘experts’ or when the advice given on what to do, is already six months late.
Last month, I wrote about the value equation and the customer’s responsibility in the planning and design phases of the custom home building process. With the political pundits and market prognosticators predicting financial Armageddon here recently, I thought it would be fun to share my thoughts on the first step of building a custom home – actually deciding to do it.
So what is the big picture? It’s quite clear we’re in a recession, just as it’s clear the S&P has lost 40% in the last 12 months. It’s also obvious that nobody can tell us what will happen tomorrow. There’s a battlefield with a trench running down the middle that separates the 50% who see fear and doom, from the 50% that see opportunity. Oddly enough though, you can walk down the middle of the trench and ask this question to both sides: “Have you heard the saying Buy Low, Sell High?“ You would be hard pressed to find anyone confused by your question. Everybody knows the principal and understands the concept; just like Warren Buffett, they get how great investors think.
The funny thing about human nature, though, is that we seem to have an almost inverse correlation in our behavior between what we know we should do, and what we actually do. When things are going well, moving up, and feeling safe, we all want to be part of it. When times are precarious, trending down, and nerve racking, we want separation and a place to hide from the ensuing disaster. In short, we want out. We buy hype and we sell pain, rather than buying low and selling high.
If you found yourself at a Halloween party in 2007 and you announced to your friends that you had just sold your shares of Google (see chart) at $685, you were probably laughed at, called a few names, and upset at yourself for opening you mouth. The stock was too hot and you were crazy to take profits before it busted through $700 on its’ way to $1000. You were a wet blanket and just sucking the air out of a festive room. Conversely, if you’re standing in a small circle at a cocktail party this month, you’d be well advised not to mention your recent purchase of the NASDAQ q’s, or better yet, shares of a financial sector fund. You would soon be standing all by yourself. The fashionable in-thing today is to mope around and talk about your safe haven treasuries earning a quarter of a percent.
How then, does all this relate to buying a new home, or building that custom you’ve been thinking about for the past several years? How could one possibly muster the courage to start a significant project in such tumultuous times? Here are some facts (and musings) to contemplate:
1) If we achieve an unthinkable 8% decline in GDP, we are still producing and consuming 92% of the previous year’s number (i.e. 2005). Was it so bad in 2004? Did the world stop?
2) Commodity prices have plunged. Oil, lumber, steel, copper, concrete – all major components of a home, have dropped dramatically in price over the past several months. The very costs that drive foundations, framing, mechanical work (electric, plumbing, and HVAC), appliances, windows and doors, etc. have all fallen. Here is a true opportunity to “buy low.”
3) Builders are getting calls from skilled trades requesting work. They’re offering price discounts to stay working. Although most good builders won’t cycle through their best trades to save a few cents on tile work or trim carpentry, the opportunity certainly exists to sharpen the pencil. At this moment, your builder is in a position to demand even higher quality at a reduced cost, and should be able to pass the savings along to you
4) Interim financing interest rates are half of what they were two years ago. On a million dollar build, this represents $40,000 – $60,000 in savings just during the course of construction. It is true that lending requirements have toughened, but it’s better for everyone if Sparky isn’t asking for a construction loan to build a home four times more expensive than what he can really afford.
5) Most builders are building fewer homes this year than last, and should have more time to provide you with the individualized service you desire. That has to be a good thing for the client. Exceptional builders will be able to scale their team and its’ capacity to deliver in any type of market, but almost all builders will find some extra time for you when the number of starts is down. (Note: be careful to examine your builder’s credit worthiness, capitalization, and recent activity with various suppliers and trades, as you don’t want to get into a relationship with a team so desperate for immediate cash, that it puts your dream project at risk).
I look at most of our clients whose homes we’ve either started in the last quarter of 2008, or are preparing to start early this year, and they all share one thing in common: nerves of steel, and excitement about the value they are getting. They’ve made the decision to move ahead at or near the bottom of the market. Recently, one of our clients was so fired up, that he proposed a 25% bonus to our team for every dollar saved on the estimate of our cost-plus contract. Most, if not all of those starting now, will enjoy higher equity in their homes than those who wait for the market to recover.
If you’ve been sitting on the fence, trying to decide whether to buy or build a new home, you should take a careful look to see what everybody else is doing. If your friends and coworkers are staying put, playing it safe, you might want to consider taking the other path. Once the swing comes, the real opportunity will have passed.