Thursday, August 29, 2013

Detroit v Brooklyn

This could have easily been a post about why Eminem is a superior rapper to Jay-Z but I will save that for when the new Eminem album comes out and buries Jay-Z's newest tribute to his royal holiness himself.

The other night, I had dinner in NYC with some Detroiter buddies and the conversation steered toward Detroit real estate (a minor obsession of mine for the moment). I did a little search for comparable properties in Detroit and Brooklyn. Brooklyn, being the edgier crustier sister borough to Manhattan where prices have gone parabolic, had more similar characteristics to the D. I found a couple 4,000 sq ft homes and here is what came back.

I thought the crime statistics were particularly interesting. Of course there are reasons why this analysis is flawed, chiefly because Brooklyn has 2.5 million people and Detroit has 700,000. Detroit covers an area of 150 sq. miles and Brooklyn is only 90 sq mi. That is a lot of less congested space to run away from stray bullets.   

Kidding aside, I did bias my search to Indian Village in Detroit and Bedford-Stuyvesant in Brooklyn so I guess this proves that the right kind of data mining can prove any thesis.  My point is that even the most dangerous parts of NYC still trade at a silly premium relative to the safe parts of Detroit. I guess it all depends on how you define "value".  

Hat tip to Larry Chen!



Thursday, August 8, 2013

Know the Downside

A good friend of mine called me the other day to ask me what I thought about some mutual funds that his broker suggested he buy.  The broker said the funds would return 7-8% per year and they are super safe investments with minimal volatility. 

I took a quick look at the funds and all 4 had MORE volatility than the S&P 500 with LESS returns. To add insult they were all about 90% correlated to the S&P 500. So basically they were just crappier versions of the stock market. 

These mutual funds were down between 20-50% in 2008. I am not sure if I would describe that kind of price movement as "safe." Besides, why invest in a mutual fund when just buying the stock market through the SPY ETF gets you better returns, less volatility, and lower fees? Brain scratch?  Not really. This particular broker doesn't earn much of a fee if his clients invest in ETF's.

After seeing the funds had the potential to go down between 20-50% if another 2008 were to happen, my friend could easily identify that these kinds of investments might not be a great fit given his objectives. Of course the broker focused more on the reward rather than the risk so the potential downside was never discussed. 

We can't know every risk before walking into an investment. And there is nothing to say that we are guaranteed to have another 2008, but a wise man once told me "your biggest drawdown is in front of you." This means that the next calamity will be worse than prior ones and if we invest with this in mind, we can take steps that allow us to live to invest another day. 

That doesn't mean sit with cash under your mattress and go buy a bunch of guns (been there done that). It means that your EXPECTATIONS on investing should reflect a fair measure of the risk of loss in a given day, week, month, year...etc.  

If you own stocks and you would be surprised if they went down 30% in one year, then you are fooling yourself. Maybe you should own less stocks. If you are ok with them falling 30% because you have a long term horizon and would welcome an opportunity to buy more should the market drop, then that sounds like a plan worth sticking to.

Expectations management and discipline separate the good from the ugly. 

I put a piece together that talks about the idea of having some knowledge of the expected volatility in advance and it was recently published on the CBOE website (link).  Felt like it is relevant for this blog too. 


Sunday, August 4, 2013

What you can get in Detroit

We used to live in the West Village in an apartment building called the Printing House.  It was an old industrial print factory that was converted into cool loft apartments in the 70's.  I recently heard the values of these apartments have gone parabolic.  

According to StreetEasy, you can buy a lovely 3 bedroom apartment in the Printing House for a cool $4.25 million. This runs for about $1,700 a sq. ft. and comes fully equipped with a doorman and all the luxury a small family could ask for. 

3 Br loft apartment in NYC's Printing House

That sounded like a pretty lofty price to a lay person like me. I wanted to see how far my money could go in Detroit.  In keeping with the "printing house" theme, I was looking for some similar loft apartments until i came across a listing for what is effectively the entire printing INDUSTRY of Detroit:  the Detroit Free Press Building.

The Detroit Free Press Building

You can own this entire historic 300,000 sq ft building for around $5 million right in the heart of downtown Detroit. They are saying it is ripe to be converted into 200 loft apartments. A sale price could come out to about $16 per sq. ft.  Not a lot of downside in this compared with owning real estate priced 100X higher. 

Talk about opportunity!  If only the mainstream media would spend less time focusing on the disaster porn and more time on the people and businesses that are coming up with creative solutions for Detroit. There are several places in the D that have this kind of potential.  Blank canvases - looking for smart and adventurous entrepreneurs who want to build something from nothing.