Capital Ideas: 5 Buffett-isms for Rate Day

Last weekend, Warren Buffett announced he is stepping aside as CEO of Berkshire Hathaway. Vice Chair Greg Abel will replace him, while Buffett will remain as chairman of the board.

The legendary investor has never been a big fan of commercial real estate investing. Stocks are a lot easier to invest in than CRE, he has famously said, because investing in property involves lengthy negotiations, and the involvement of multiple parties beyond just the equity holder.

But while we absorb the Federal Reserve’s decision to keep interest rates where they are, it’s a good time to review some of Buffett’s broader investment principles (along with some of his quote-worthy statements) that ring true for CRE regardless of where interest rates end up.

1. Invest for the long term

“If you aren’t willing to own a stock for 10 years, don’t even thinking about owning it for 10 minutes.”

While stock prices change daily, Buffett and late partner Charlie Munger built an investment empire buying long-term holds.

That gives Buffett something in common with most real estate investors, and it is something to keep in mind in the current environment. While interest rates, tariffs and expiring tax policies are creating uncertainty, real estate is a long-term investment. It’s also more permanent than most hard assets, and it mostly serves a critical need, as Brookfield Property Partners CEO Brian Kingston noted at a recent conference.

2. Buy assets, not trends

“The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage.”

Buffett recommends investing in companies rather than rather than industries, and he emphasizes diligent research about potential purchases.

CRE’s recovery has been uneven, so it’s more critical than ever to understand everything about a property and its place in a submarket rather than buying a property for its type or trendy location.

3. Buy value, not price

“Price is what you pay, value is what you get,” and “It’s far better to buy a wonderful company at a fair price, than a fair company at a wonderful price.”

Buffett is the ultimate value investor. But he’s always been careful about understanding which companies are truly undervalued and which aren’t.

As more real estate investors finally capitulate on price, investors are flocking to acquire bargains, particularly in CBD office markets like New York and San Francisco, where transaction prices have come in drastically below their previous purchase prices. But, as Buffett has noted, price alone does not determine value or under-value.

4. Preserve capital

“The first rule is never lose money. The second rule is never forget the first rule.” 

For Buffett, the key to building wealth is preserving the initial investment rather than just aiming for high returns. Today’s money managers would do well to keep in mind that, while there is a lot of institutional equity on the sidelines chomping to get back into the real estate business, risk is elevated and the appetite for risk is low.

5. Concentration beats diversification

“Diversification may preserve wealth, but concentration builds wealth” and “risk comes from not knowing what you are doing.”

Diversification has long been seen as a risk mitigator, but Buffett believes diversification is a good strategy for those who don’t know what they are doing. If you really know an industry, he doesn’t see the need to spread yourself out.

In CRE, there are few companies—we all know which ones—that excel in every property type accumulate. In challenging times, there’s a lot to be said about a strong focus, critical mass and operational expertise.