How the World's Best Investor Made 5x Profit in a Bad Real Estate Market - Smart Contrarian by Equitymaster
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How the World's Best Investor Made 5x Profit in a Bad Real Estate Market

Jan 31, 2018

Rahul Shah, Editor, Smart Contrarian
  • "Games are won by players who focus on the playing field - not by those whose eyes are glued to the scoreboard." - Warren Buffett

Warren Buffett is the best investor in the world. His wealth of US$ 90+ billion speaks for itself.

He made most of this in the stock market...but not all of it.

In 1986, Warren Buffett invested in real estate. Specifically, he bought a 400-acre farm.

What did he know about farming?

Nothing, as per his own admission. But it turned into a huge multibagger.

Buffett rarely talks about this and few are aware of it. Today, I'm going to break down that great real estate investment for you.

The story takes us to Buffett's home in Omaha, Nebraska in the US mid-west. The year is 1986.

In the 1970's and early 80's, inflation in the US was running high. Farmland prices in this region went through the roof. Many people believed inflation was getting out of control. They bought farmland because they thought its price would go up along with inflation. This is a common mistake.

The small banks in these areas, willingly gave out a lot of easy loans to these people. Not surprisingly, many fell head over heels for farmland.

They thought farm prices could only go up. So they didn't mind taking heavy loans to buy it.

Like many times before, and many more to come, the situation turned into a classic bubble.

When it burst, prices of farmland crashed more than 50%. Both the farmers and the complacent bankers were devastated. Five times the number of local banks failed in the aftermath as did in the 2008 credit crisis.

But Warren Buffett saw an opportunity.

In 1986, a 400-acre parcel of farmland close to Omaha sold for about US$ 280,000. This was far less than what a failed bank had loaned against that farmland just a few years back.

As I said, Buffett didn't know anything about farming. But it was common knowledge that these areas of the US are great for growing corn and soybeans. So he found out from his son (who loves farming) just how much of these crops could be produced in a farm of that size. He also learnt about the costs of growing these cops. Buffett calculated the annual profits from such a farm would be about 10% of the US$ 280,000 price tag.

Now keep in mind, farming methods and crop varieties improve with time. Thus, the productivity of a well-managed farm would go up as well. And of course, crop prices too move up over the long term.

It was a no brainer. The 10% annual yield would go up over time...

Buffett bought the farm.

He reckoned there was no downside and potentially a large upside in the profits the farm would produce. Now, of course, there would be an occasional bad crop, and corn prices would sometimes be a letdown. But there would be some bumper years as well. And in the interim, if the farmland's prices went lower, it wouldn't make any difference to the calculations of his returns from the farm.

And that was all the analysis he did. Do you think it was too simplistic?

That farm now makes about three times the annual profit it made in 1986. It is worth more than five times what Buffett paid for it. This is over and above all the money that farm spun-out for Buffett every year over this entire period.

Needless to say, it was a highly successful investment.

What can we learn from this investment?

Warren Buffett's focus when making his decision.

He focused on the profits the farm could turn in for its owner, and not on what the farm's price would be next week, next month, or next year.

By his own admission, he thought only about what the farm would produce and cared not at all about its daily valuation.

Whether it is buying real estate, stocks, or anything else in between, like Buffett it's important to have a smart strategy like this one in place.

And you too could make the most profitable investments!

Happy Investing,


Rahul Shah (Research Analyst)
Editor, Smart Contrarian

PS: The Cryptowallah, Prasheel Vartak, is releasing the sixth lecture of his 10-video series on cryptos and blockchain today. In his latest lecture, he explains all about storing your bitcoin in digital wallets. Join Prasheel and his international crypto guru here...

Brain Food for the Day

Pension Funds Want a Piece of the Crypto Pie

What a turn of events it has been in the crypto world, especially in South Korea.

While South Korean authorities are constantly trying to figure out how to control and regulate the cryptocurrency market, the South Korean National Pension Service (NPS) is actually a supporter of this market.

The pension fund has apparently invested billions of won in cryptocurrency exchanges, like Korbit, Upbit and Bithumb.

Local media reports that the NPS has invested no less than 2.6 billion won (US$ 2.4 million) in crypto exchanges through its venture capital funds.

The National Pension Fund of South Korea is the third-largest pension fund in the world, and the fact that it has made such an investment is particularly noteworthy now, considering that South Korean officials are hell bent on regulating the country's crypto market.

The first South Korean crypto regulation kicked off on January 30; banning the use of anonymous accounts for cryptocurrency trading.

What happens in the South Korean crypto market affects cryptos all around the world, considering it is the world's third largest crypto market.

Prasheel Vartak has his finger firmly on the crypto pulse, and will keep you on top of the crypto world's comings and goings. Join him here.

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1 Responses to "How the World's Best Investor Made 5x Profit in a Bad Real Estate Market"

S.K.LIMAYE

Jan 31, 2018

Nice article by Rahul about Buffett's farm land investment.Why not release Cryptowallah's videos free for those interested ?

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Equitymaster requests your view! Post a comment on "How the World's Best Investor Made 5x Profit in a Bad Real Estate Market". Click here!