In one sentence: A rerun of 033, with only a new two-minute intro: Phil introduces Mecham's "free lottery ticket" idea in one line and then replays the real-estate episode (Buffett's farm and New York building, the all-weather portfolio and why stocks give more chances to buy on sale).
What's new
- A new intro (00:00–02:30). Danielle is still ill, so Phil frames the rerun with the idea that the best investors focus on not losing money. He quotes Mohnish Pabrai's "free lottery ticket" and Allan Mecham's worry about permanent loss (see 285). [00:00–02:30]
- Show notes versus audio. The show notes argue that leverage doesn't make real estate the better start: $50,000 compounding at 15% for 30 years is about $3.3 million, with far less management work than a rental. The audio never makes that calculation. It argues through cap rates and circles of competence, so treat the $3.3 million figure as the show-notes version. [show notes]
Where the rest is covered
Everything after the intro is the 2015 episode, so see 033 for the farm, the NYC building, cap rates and the all-weather portfolio. The points below are the ones worth keeping in mind on re-listening:
- Narrow it down. Understanding real estate in one downtown is far easier than in a country. The same holds for stocks: a small circle you know deeply beats a wide one you know shallowly. [10:00–14:00]
- Scuttlebutt (Templeton's word for keeping your ear to the ground) is easy in your own town. In stocks the problem is filtering the internet, not finding information. [14:00–19:00]
- Cap rate as the real-estate sticker price. A 5–6% cash yield is roughly retail, 8% suggests a discount, and the target for a Rule #1 portfolio is still about 15% a year overall. [31:00–34:00]
- Diversification across asset classes is a different thing from diversifying within stocks. An all-weather mix (Ray Dalio's idea) lowers volatility but doesn't beat the market, and Phil says it needs a lot of capital to live on. [24:00–31:00]
- Why stocks over real estate. Real-estate cycles are slow, while some stock industry is nearly always on sale. [51:00–54:00]
Buffett, Munger and Graham links
- See 033. The farm and the building are Buffett's, retold from Phil's memory, so check the details against the Berkshire 2013 letter before relying on them.
Words to know
- Cap rate: first-year net income divided by price, the real-estate version of an earnings yield.
- All-weather portfolio: Ray Dalio's mix of asset groups chosen to hold up in any economic climate.
Try this
Take a business you know from your own town. Estimate what a buyer would pay for it using its yearly profit and a cap rate, then compare with a listed company in the same line of business on /stock/TICKER/.
Check yourself
- What is the new content in this rerun?
Answer
Only the short intro on Mecham, Pabrai and not losing money. The rest is episode 033. - Why does Phil still prefer stocks to real estate for finding bargains?
Answer
Stock-market industries cycle in and out of favour all the time, so there is nearly always something on sale, while real-estate cycles are slow.