Lesson 1: Informational advantages matter especially when trading with serious kids err ahh I mean counterparties. I traded cards with kids that collected and traded cards. We took it seriously. They were all well informed about the values of the cards we would trade. I’m not saying this was ethical, or that I’m entirely proud of it, but one of my favorite moves was having a friend over just after the latest Beckett Baseball Monthly (Beckett) was released. I’d memorize the largest increase or decreases in the value of the cards that the kid owned and that owned in order to formulate my list of what I wanted from them and what I wanted to trade to them. Then, I’d hide the new copy of Beckett.
I’d stash the previous month’s issue in the corner of my bedroom, they would then come over to my parent’s house and we would begin trying to put a trade together. For example, if I got together with a classmate in early August, I’d focus on the cards they owned that had gone up in value the most between July and August. Inevitably at some point they would want to reference the latest Beckett and would see my (slightly dated) copy in the corner. They’d pour through the numbers and we’d strike a deal that looked good, at least that would look good based on the July values. I was fleecing them as far as the new values were concerned.
How does this apply to your real estate business? The best deals I have done has involved trading with uninformed counter parties. Think estate sales.
Lesson 2: you are better to avoid serious counterparties.
Children were attracted to baseball cards in part by the great money that people had made from cards manufactured in the 1950s, 60s and 70s in general. But some of this money was made trading against uninformed counter parties. Think: a parent that is selling his child’s card collection in the 1970s for a song at a garage sale. By the time I got into the market, lured by these types of stories, there were no uniformed counterparties any more.
As real estate investors we want to find counterparties that either don’t know the value of what they have or whose primary goal isn’t getting “top dollar.” I’ve bought plenty of homes from people who have a larger bigger issue in their life that is more important than getting top dollar for their home. I’ve also bought property from people that don’t recognize the potential of their property. These are counterparties whose priorities are different and whose goals are not strictly financial.
Lesson 3: better to be the baseball card manufacturer.
My father would always remind me that nothing precluded the card manufacturers from printing more baseball cards, but that kind of dilution of value didn’t seem plausible to me—probably because I didn’t want to hear it.
What’s the analog to the baseball card printing press in real estate? New construction. Today, when we are building a home we are able to price our cost into the project such that we can build a new home, that is larger than and has newer features (10 foot ceilings, bull-nosed corner bead, open floor plans, fire sprinklers etc.) than recent sales in the same neighborhood. For example, if a recent existing home sale sold for $600,000 we run our pro forma such that we can deliver a larger new home at an all in cost of $600,000. Now we might expect to sell this home for $750,000 but our downside is protected by the existing home comps.
Lesson 4: Invest into forgotten markets. Okay, I’ve ripped off this notion of investing into forgotten markets from Sir John Templeton but there are lessons from the baseball card bubble here as well. By 1990, the popular perception was that baseball cards had value. By the time an asset class has been broadly viewed as having value, everyone that is going to take part in the game is already in the game. In other words there are no new buyers. It’s topped out. It’s over.
The 1994 MLB strike pricked the pin in the baseball card bubble. I still have my collection. Any economist worth his or her salt would suggest I sell them all for whatever price they might garner. My loss, they would reason is a sunk cost. But I can’t bring myself to sell them. Nor, I suspect, can the other children with whom I traded cards.
When I flipped homes in 2011, the cocktail party banter was predictable. People would ask what I did for work. I told them that I invested in real estate. They’d look at me like I was an idiot that had not gotten the memo that real estate investing was a sure fire way to lose money. Of course, back in 2011 I was shooting fish in a barrel. Are there any forgotten markets to invest into today? If your market is overvalued what more important question could you be asking right now?
Lesson 5: It’s not enough to “buy right” you have to buy THE right asset class. As a boy my clear, albeit ethically dubious, technique of acquiring cards based on my new price information while selling cards based on old price information gave me an edge when trading. I acquired cards at a discount to their relative valuation. I have an old mentor from early in my career who used to tell me: “You can go broke on relative valuation.” I wish I met him before I began trading cards. Though I was getting great relative value the absolute value of baseball cards was horrible. Trading cards in 1990 and 1991 meant buying in to an overvalued asset class that offered zero yield. Maybe this is the big lesson for all of us.