The more I look at different “deals” the more I get convinced everyone is looking at the same stuff in different wrappers. My first home purchase was located at the corner of Division and Clybourn in Chicago. It was a very cool property with an incredible view of Chicago. In fact, it probably had the best views of the city I’ve seen.
Why was I able afford it? Because it had a massive downside. The home was located near Cabrini Green. See https://en.wikipedia.org/wiki/Cabrini%E2%80%93Green_Homes
I was betting on Cabrini Green coming down and the neighborhood drastically changing. I figured even if I paid a little too much for the property the neighborhood would change so much that the price I paid would look like a bargain.
So why was this “investment” unsuccessful? For starters, the global financial crises came and development completely stopped. I probably should have known the housing market was phony when I could get a loan as a law student and provide no documentation. But, at the time I wasn’t able to think the way I do now. So let’s put the greater housing market in the “outside of my control bucket” for now.
More importantly, I was the dumb money. I should have done more research to figure out whether the neighborhood changing was a realistic expectation. Once I moved into the home I learned that my alderman and the alderman for the low income housing across the street were different people. That means they were serving different masters. Therefore, they had different incentives.
Those incentives are massively important in a city like Chicago. Alderman have a ton of power. That was a fact that I could have known but didn’t even think to look into.
Which leads me to comment on the most important piece of advice Warren Buffett has ever given: create a too hard pile. I am fairly confident in my ability to see a home in an existing neighborhood and determine whether that home is a reasonable value. What I am not comfortable with is my ability to determine (1) which neighborhoods will gentrify and (2) the rate they will do so. Therefore, an investment that requires gentrification by a certain date should be “too hard.”
For the longest time I thought Buffett said things were “too hard” when he couldn’t really understand them. But, can’t Buffett understand almost any business concept? Yes. So how do 90% of the things he looks at end up in his “too hard” pile? Because their success is too difficult to determine.
At the moment I believe the common stock of General Electric is incredibly cheap. In fact, I think it’s quite possibly the deal of a lifetime. Yet, Buffett isn’t buying. Why? I believe there are issues within the entity he thinks are “too hard.” I suspect he looks at some of the business lines and views turning them around in a similar vein to how I should have viewed the potential gentrification of my first neighborhood.
Remember, there is no requirement to play a game you don’t understand and/or want to get involved in. No is a perfectly fine answer. Get in the habit of saying this is “too hard.” It will help your results over the long term.