From hard knocks to wide moats

Some people get their MBAs from prestigious colleges and universities. Others, like me, get the equivalent from experience.

There’s no cap and gown that way, admittedly. Or diploma to hang up. Even so, there’s a lot of value to jumping right into a hands-on education rather than spending several years on book learning first.

At least that’s what I’ve found.

My classrooms were literal constructions sites, bank conference rooms, zoning hearings, lease negotiations… and occasionally even courtrooms. My professors were bankers, contractors, tenants, lawyers, and business partners.

In some ways, I guess you could call it a school of hard knocks, where I learned what I learned through trial and error. And when I erred (which I most definitely did), believe me when I say the results could be worse than a bad grade.

All the same, I’m exceptionally grateful for all those experiences – the good and the bad – because they led me to where I am today, knowing what I know and doing what I do. Without my particular educational “degree,” I wouldn’t be here to share what I share with the kind of confidence and results that I have.

Trust me when I say that the real estate development business forces you to understand value from the ground up. That’s how I learned all about:

And how each one can be so crucial in exacting the best, longest-lasting profits from any property.

The same goes for risk. In fact, that consideration might be the most important out of the whole list – and the most nuanced. Sometimes, it’s downright unpredictable.

For instance, weather happens. So do recessions and hardcore market shocks.

Likewise, tenants can go bankrupt. Banks can stop lending. Construction costs can explode, and deals can fall through.

Do you know what else can happen? Debt – a risk I didn’t take seriously enough for three decades as, deal by deal, I built myself into a multi-millionaire.

I thought it was enough that I was working hard and carefully evaluating each transaction before I signed on the dotted line. But, boy, was I wrong.

Leverage can be a great tool under any set of circumstances, helping businesses to grow in ways they otherwise couldn’t. But while debt magnifies returns on the way up, it also magnifies mistakes on the way down.

That might have been the very hardest lesson I learned at Hard Knocks University. Worse yet, I took both the Bad Leverage 101 and the 102 courses – the first when I was involved in a partnership gone wrong, and the second shortly after when the housing market crashed.

Even though I’d spent decades building up a portfolio of assets… a Rolodex of relationships… and a wealth of knowledge…

The weight of my debt took me down as easily as a Category 5 hurricane capsizes a life raft. I felt like I was drowning in the aftermath.

But, as they say, feelings and facts can be very different. And so I did everything I could to set the first aside in favor of assessing the second.

That’s how I realized (with some effort, mind you) that I still had something valuable to share. People might not need me to physically facilitate and maintain properties anymore.

Yet that didn’t make my knowledge base worthless.

Recognizing that, I began writing articles on Seeking Alpha in 2010. While I covered a variety of topics, my main niche was the real estate investment trusts (REITs) I still write about today.

That was a topic that got me a lot of attention. For one thing, everyday analysts weren’t giving REITs nearly enough attention. For another, my real-world experience gave me a definitive edge over textbook assessments.

When I looked at a shopping center REIT, for instance, I didn't just see numbers on a spreadsheet. I understood its physical proportions and what they cost to construct, along with its lease structure and tenant credit.

Even more importantly, I understood the durability of the cash flow it produced. That’s what matters most with any kind of property, whether it be a shopping center, apartment, office, warehouse, data center, or cell tower.

Better yet, the more I’ve studied these and other REIT sectors, the more I’ve learned as a result – enough to fill four business books, actually, including REITs for Dummies, as shown below.

Of course, REITs alone don’t make a strong portfolio. As I wrote in another of my books, The Intelligent REIT Investor:

Either way, a strong portfolio requires a strong level of diversification.

That’s why, about five years ago, I began assembling a group of hand-picked analysts who could cover other areas of the investing world, such as:

The stock picks we recommend still have to have durable competitive advantages that can generate exceptional long-term shareholder returns. But other than that, my team and I are open to the possibilities.

That’s how Wide Moat Research came to be.

Living investing legend Warren Buffett famously described economic moats as durable competitive advantages that protect businesses from competitive takeovers. And in some way, shape, or form, I’ve spent most of my career studying those advantages.

Sometimes they come in the form of real estate, scale, a network or brand, switching costs, or intellectual property. Other times, it's simply a management team that knows how to allocate capital better than everyone else.

Whatever power they wield though, Wide Moat Research seeks to find these companies, determine what they’re worth… and track their valuation until they’re trading at intelligent entry points.

When we do that, it doesn’t tend to matter what economic storms come our way. We can be confident that our portfolio picks have something bigger and better than a life raft to weather the waves.

That’s what my lifelong education has taught me: that when we look beyond the textbook, dig deep beneath the surface, and commit to buying the best companies at the best prices – without leveraging ourselves into untenable positions, mind you – we can build something worthwhile that really lasts.

So here’s to my alma mater, the School of Hard Knocks: It might have taken all I had to get my MBA there, but I wouldn’t trade the experience for everything Harvard has to offer.

Happy SWAN investing,

Brad Thomas
Editor, The Wide Moat Daily

P.S. In the last few days, Wide Moat Research has published multiple YouTube videos, including one about “2 high-yielding REITs”… the “9 stocks at the top of” Nick Ward’s watchlist… and two fascinating interviews with real estate CEOs. Click here to watch one or all of them!