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Thank you for joining us on the Real Estate Investing Book Club podcast with your hosts Chris and Mike. Hello and welcome back. I'm Chris Davis. This is the Real Estate Investing Book Club podcast and I'm Mike Lwin. Let's get this guest going here. We are discussing one of the most influential investing books, not just real estate books ever written.
A little book that beat the market by Joel Greenblatt. Now, if you're primarily a real estate investor, you might be wondering why a stock market book has to do with rental properties. Actually quite a bit. Exactly. This book isn't just about stocks. It's about identifying great businesses that are selling for less than what they're actually worth.
So, if you replace the word business with rental property, then you realize the same concepts apply directly to real estate investing. So, whether you're buying a duplex, an apartment building, a self-storage, mobile home park, or even making private loans, you're always trying to ask one question, and that question is am I buying an asset for less than it's actually worth?
And that's exactly what this book teaches. Yeah. So, Joel Greenblatt isn't just another finance guy. Um, he's the founder of Gotham Capital, a hedge fund that reportedly averages, I can't believe these numbers, but approximately 40% annual returns before fees over an extended period. He also teaches value investing at Columbia Business School, the same institution where Benjamin Graham, the father of value investing, once taught.
So, when Greenblatt explains investing, he's speaking from decades of real-world experience. And one thing I really appreciate about this book is that Greenblatt Green Joel Greenblatt intentionally wrote this so that somebody with a very basic understanding can get these concepts. Yeah. He takes concepts that are extremely complicated and uses very simple stories, and to me, that simplicity is one of the strengths of this book.
Yeah. Um, so, what's some of the biggest investing investors make? The main theme, I think, is that most investors chase excitement. I'm guilty of that. It's such a value, but I think Mike got it. What do you think about Greenblatt? Yeah, I'd say one of the first lessons he has is surprisingly simple, and that is a great company isn't always a great investment.
People will consistently overpay for quality simply because everybody else wants it. Yeah. That's a huge distinction. People confuse quality with price. You know, Ferrari is an incredible automobile, but someone paying $5 million for it, it probably isn't a good investment. The exact same thing happens in a estate.
Exactly. People get emotionally attached to it. So, brand new construction with luxury finishes in the in one of the hottest neighborhoods with HGTV quality renovations instead of asking if what I'm actually paying for this is going to be profitable investments. Yeah, sometimes an ugly duplex down the street produces much better returns than a beautiful house that everybody's fighting over.
Yeah. So, buying on cash flow instead of emotion is really kind of underlying theme of this book and understanding the intrinsic value instead of just you know as opposed to just you know following the market hype. Yeah, I agree with that. Totally. I think it's easy especially in a hot market to be looking at things like that where the sexy neighborhoods are great neighborhoods.
I always like to be worst house best neighborhood situation where on the trend ahead of the trend a little bit. Maybe a neighborhood that's trending or becoming different. That's really important to me. So, let's talk about the heart of the book. Green plants I think is magical formula when it comes to using only two measurements and we'll get into this earning yields and return on capital.
I think this is really the heart of the entire book, you know. So, really it's what the yield is and then the return on capital. And let's break down each measurement into some real estate language a little bit. Like I'll take earnings you want to talk about capital. How's that? So, earnings yield, how much profit are you receiving from every dollar invested?
This is how I even look at my business. Um if I invest in bringing an employee on, what am I getting back from an employee? If I can get 3x, I'm super excited. And obviously that's going to be some free up time for me, things like that. But looking at what you're getting from that yield is very important.
So, the higher the earnings yield the better. Right. So, let's bring it back to real estate. So, imagine two duplexes and both are producing exact same rental income. But one costs $150,000 and the other costs $250,000. So, which one would you rather own? And you know, the the obvious answer is the cheaper one.
It's because you're receiving the exact same income while investing far less capital. And that's essentially what earnings yield measures. So, let's open up return on capital a little bit. How efficiently does a business produce profits? So, real estate investors understand this instinctively. Imagine two-part buildings as you would with your dental or medical income we've talked about.
Like one requires constant maintenance, has higher vacancies, consumes far more management time, and costs the most repairs. The other operates smoothly, which is a better business. One producing more profit with fewer resources, that's return on capital. I'll let you again take from there, Mike. So again, like translating that back to real estate.
Yeah, so instead of simply buying cheap properties, it's important to buy efficient properties. So, what to look for? So that would be looking for strong occupancy, low maintenance costs as you mentioned, durable construction, you know, efficient management, and consistent cash flow. And the goal was buying a great business when it's selling cheaper cheaper than market value.
I think that's important. You know, definitely the market ones out there. So, let's talk about that. You know, Mr. Market is emotional. So let's just talk about this for a second. So markets overreact, just like people overreact. I think that's real important. Mike, you want to touch on that? Hit on that last important point.
Sure. You know, Joel Greenblatt reminds us that markets are emotional. People buy because everybody else is buying. People panic because everybody else is panicking. Investors shouldn't follow the crowd. Yeah, I agree with that. I think real estate goes through the exact same cycles. I mean, if you look at any kind of cycles, they go up and down.
I think about 2008, fear was everywhere up to 2012. And you could pick up 2021 were totally excited where people were waving inspections, bidding tens of thousands over asking price, buying houses they never had even seen. Neither environment represented rational investing. So I think the discussion would be fear creates opportunity, and greed destroys discipline.
So if you go to headlines and focus on fundamentals, um you know, real estate example, a property's been sitting on the market for 180 days. I love these kind of properties. Most buyers assume something must be wrong. But maybe the seller overpriced it initially, especially when you're coming to the end of the market.
That stale listing could become your best investment. That's happened to me time and time again. Mike, you want to jump in on our next segment? Yeah, and we'll talk about why most investors underperform. Yeah, so you know, one of the most interesting points Joel Greenblatt makes is that investors actually know the right strategy.
They just don't stick with it. So that reminds me so much of real estate investing. You know, someone buys their first rental, uh 6 months later, nothing exciting has happened. No huge appreciation, no viral success story. So they assume their investment isn't working. But investors who build wealth usually are the ones who simply just stay consistent.
Yeah. So you know, compounding requires patience. Consistency beats excitement. So discipline wins over So real estate example is that just you know, rental appreciation. I will just back up what you said. Totally agree. We got a friend, he talks about the slow nickel and the fast dime. I really believe that and at the end of the day I'd rather have my nickel and keep it versus paying and overpaying, have a dime and maybe losing it.
So, I think some examples are, you have rental appreciation, rents are going to go up. Typically, you know, historically they're going to do that. Your mortgage amortization, you're going to pay that thing down and build up equity. You have the debt pay down, it's huge. Increasing rents is something you can always do.
Tax advantages, we can't we don't have enough time to get into tax advantages of real estate, but none of these are exciting month to month, they're just not. But, over 10 or 20 years it becomes very exciting and very lucrative. So, it becomes life changing. I think both Mike and I would agree on that.
I think Joe and Cream would agree as well. So, um think like a business owner. I think this is important, we try to do that here, but Green Light encourages you to stop looking at ticker symbols and start looking at businesses. They'll elaborate on that with what you think. Yeah, you know, that's exactly how a successful real estate investors think.
Yeah, so, you know, we're not just buying buildings, we're buying income producing businesses. Yeah, so, a duplex isn't valuable because it's attractive, it's valuable because it consistently produces cash flow. So, you should ask yourself, you know, why would I own this business for 10 years? Yeah, would I buy the entire company?
Would I buy every apartment in this complex? Would or you know, another question, would I purchase every property on the street? And thinking like an owner changes everything. No, I totally agree that. I think it's let's have a holistic picture in my mind, a long-term picture. I think that's what investing is.
When people say, "Hey, I'm buying a house, fix it up and selling." That's flipping. I think a lot of people do that with stocks as well, they flip stocks. I don't think that's investing. What we're talking about is having that long-term business mind approach, I agree. Just talking about some maybe shortcomings in the book, no book is perfect first off, but I think no investing strategy works perfectly forever.
And that's where you can read the book, I've read books from the '80s, they are just not relevant. We have friends that talk about tax advantages of real estate from the '80s, they're just not relevant anymore. So, I think no investing strategy again works perfectly forever. Let's talk about where the book has limitations, Mike can hit on that a little bit, you know what I mean?
Sure, so the magic formula, which as mentioned in this book quite a bit, isn't actually magic. So, sometimes value investing underperforms growth investment year after periods of years. So, those difficult periods where many investors abandon the strategy and unfortunately, that's usually right before the value starts increasing and coming back into favor.
So, you know, there's a And this book is well This book is about stock investing. So, because of that, there's a There's not very much discussed really at all about the using leverage using debt, you know? So, it doesn't invest private investing. Again, very minimal discussion of taxes, which is I think a massive advantage to real estate investing.
And it doesn't teach you to do emotionally after making an investment. Yes. Yeah. So, it should be a component. Yeah, I would agree on that. So, let me just have a listen take away from real estate cuz we'll talk about real estate investing. So, let's just do this the biggest lesson real estate investors can apply immediately.
And what just stands out for you, Mike, some of those lessons? I'd say number one, don't confuse quality with value. You know, the nicest property isn't always the best investment. Yeah. So, number two, buy assets with strong returns. Yeah. Cash flow matters. Yeah. Number three, talking about emotions, stay patient.
You know, real wealth compounds slowly. Yeah. Number four, ignore market emotions. Yeah. You know, fear and greed create opportunity. Again, we need to invest systematically, develop a process, and trust the numbers. And as much as you can remove emotion from your decisions, the better. Yeah, I totally agree with that.
I just think some things we'll kind of get into it about growth versus value. Let's go ahead and talk about that a little bit. I think it just depends on what your goal is. I think part of it is having objective what is my best property as you read number one. You know, things will start to take off until any one, two, three, four, five even.
And that's where we found things out. We bought things that were super low in price, fixed them up nice, they appreciated, and the rents are coming in and slowly growing cuz you can't take a tenant from $600 a month when that's crazy to $1,800 a month without them leaving. But if they stay, you can incrementally raise that.
That's where the value comes in and growth. And as this time I agree as performers are houses that would be considered C-class real estate. They'd be able to come in and value one of many ways. Sometimes it's just raising rent. Other times it's fixing up and raising the rent. So, I think that's where our growth can come in there.
So, go ahead, Mike. Do you want to touch on that a little bit? Yeah, just like you said, every investor has their, you know, their own strategy. So, again, growth versus value. Yeah. What are you trying to do? And, you know, what is value to Yeah, we can We can always go back to it even if a property is cash flowing a little bit less than another and then, you know, another property, but you have perfect management, you have great tenant, and don't have to spend any time on it.
Well, you have to ask yourself, what is the value of your time? And to me, that is the most important thing is your time. So, again, there's a million factors that, you know, are are specific to each individual investor. Yeah. And I think going back to businesses, when it comes to stocks or even I consider a business to be a house or a portfolio of houses, you got to get for a fair price.
And what that means is it's got to be a win. It's got to be a great price for the person you're buying it from. And at the same time, it's got to make sense on your spreadsheet what you're doing. So, I think, you know, an average business at cheap prices is that good or bad? What do you think, Mike?
It's all about connections. So, finding a great business at a fair price is is difficult thing, but again, staying consistent and having a process I think is is what sets the difference between success and failure and mediocrity and and, you know, above average returns. For someone to talk about stocks, I used to do stocks before I went to mutual funds, so I'm not going to poo-poo on people who do finance and planning.
I'm going to bring this up. Can anybody consistently time the market, Mike? I hear it all the time people do it, but can someone do it consistently? In my opinion, no. You can't can't predict the future. I agree. I agree. I agree. What's one of your What's one of your favorite books written on it? What's one of your favorite lessons from the book, Mike?
Discipline beats intelligence. I agree with that 100%. I think like you and I laugh about this. People have made a ton of money in crypto, a ton of money, and somehow they mistake that for being intelligent. Where what do you think that is, Mike? Do you think they're super intelligent or what do you think?
Again, just we've talked about timing the market. Yeah, they just right place the right time. And you know, there's a lot of luck involved as well. And you know, nobody likes to talk about that. Yeah. I just want to hit on something before we kind of wrap up. This is something we really got serious about real estate right in the middle of COVID.
COVID literally happened in March. We started our LLC right about after in April, a partner and I. And then we found real estate was booming I mean, but I just kept telling myself I can't keep doing this. And I did for four more years. But we found our best deals during that time and the market was taking off.
We were buying great value add properties. And I really think part of that is what was our strategy. And we had a strategy of finding value add either in a hot market when prices were high, we look for value add properties and could force appreciation, fixing up, raising rents. And that was our strategy.
So, I think the strategy is super important. I like that he really highlights that here in the book. For For I thought that was the biggest thing I took away is it kind of validated me a little bit, but also kind of gave me the reminder that hey, value add is the way to go. But Mike, what do you say this book goes up my favorite books right up.
What do you say that one being the worst, 10 being the best, how many houses would you give this book, Mike? I give this nine and a half out of 10 out of 10. I knew you were going to say that. I know this is one of your favorite books, but go ahead talk a little more why you like the book so much. Sure.
Again, this is about stocks Yeah. more than it is about real estate. Yeah. But again, I think this is one of the clearest introductions to value investing that I've that I've Yeah. So, I think children first start reading this book and understanding kind of what the market is and how the market doesn't is emotional and doesn't necessarily make sense.
So, this book really sent that message home. If you don't mind, I I had a story we didn't plan for this, but tell our viewers how you heard the book and how you came across the book and kind of the back story how you got into it. Absolutely. So, one year, about 20 years ago, brother who works in finance gave a copy of this to everybody in our family.
And as an explanation, a very basic explanation to kind of show what he did and how he started investing in in these sort of instruments. So, Joel Greenblatt wrote this for his children to explain the same, you know, the same thing, explain kind of what he does in terms that, you know, somebody in, you know, grade school, middle school could understand.
Yeah. that's why I really like it. If you can really understand the basics, Yeah. that's I think you're ahead of a lot of Americans. Yeah. This is where we kind of wrap it up. I just want to dive in. I like things to take complex things and make them simple. I think this book does a really good job about that.
I think most people who are intelligent, who are X level thinkers, they have a hard time sometimes breaking down complex things simply. I think he does a great job with this book. And the book is so small, Mike, you can read it pretty easily. I mean, I'm talking about two evenings if you really hunker down.
Even if you're a slow reader, you could do it probably three evenings. That's why I like the book. It takes a complex thing and makes it simple. So, I totally agree with you. Just kind of wrap it up. Whether you buy a share of company or for you to part buying the goal is exactly the same. Buy a dollar's worth of value for 50 cents.
That's a timeless investing principle I wish people would agree. If you joined today's discussion, be sure to subscribe to our real estate investing podcast podcast club here. And Mike, we're going to wrap this up. Of course, as we always say, the goal isn't finding the the hottest investment. It's consistently buying quality assets for less than they're worth.
And you know, stay disciplined. See you next time. Thank you for joining us on the real estate investing book club podcast with your hosts Chris and Mike.
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