Mobile Home Park Mastery: Episode 193

Speculation vs. Income Investment: A Primer

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Mark Cuban recently said that “the intrinsic value of anything – Bitcoin, an ounce of gold, or a share of GameStop – is simply what people believe it is. Nothing else matters.” That has to be the worst investing theory of all time, and is the root of all speculative bubbles. In this Mobile Home Park Mastery podcast we’re going to discuss the concept of actually “investing” as opposed to “speculating” and why mobile home parks are not rooted in the whim of the public but in cold, hard cash. Charlie Munger would like this discussion (Warren Buffett’s business partner) as he has long been a skeptic of the new concept of herd investing.

Episode 193: Speculation vs. Income Investment: A Primer Transcript

Mark Cuban recently gave some of the dumbest investment advice I've seen in recent times. He said, "The intrinsic value of anything - a Bitcoin, an ounce of gold, or a share of GameStop - is simply what people believe it is. Nothing else matters." This is Frank Rolfe, the Mobile Home Park Mastery Podcast. We're going to be talking about asset bubbles and why you should never invest in things that don't actually tie back to some tangible measure.

Let's start off with the six biggest bubbles in world history. Let's go back to 1636 and the Dutch Tulip Bubble. This is a bubble created by people thinking that tulip bulbs, which back then were highly collectible and desirable as a form of decorating your yard or home, that they somehow were growing in importance, and that people would pay endless vast amounts for these tulip bulbs. After they rose in value to unbelievable levels, the whole market collapsed because people suddenly realized wait a minute, these are tulip bulbs.

Then in 1720 you have the South Sea bubble. What happened was you had a company called the South Sea Company and it was granted a monopoly over trade with South America. Everyone thought that South America held vast riches of all kinds of items - gold, gemstones. Turned out if there was a lot there they weren't able to find it, and the stock after rising to unbelievable proportion collapsed.

Then you had of course the stock market collapse of 1929. We all know about that one. Once again, people lost their perspective on the value of the asset and ultimately after rising, it collapsed. Then the Japan stock market bubble of 1980s, kind of their version of our 1929. You had the value of their stock exchange triple between 1985 and 1989, even though the income from the businesses represented in that stock exchange did not change one iota, and then of course it collapsed.

Then you had the dotcom bubble of the 1990s. You had the NASDAQ drop 80% between 2000 and 2002 because people put values on pretty much anything with a dotcom on it. It didn't matter what the word was or what the concept was. If it had a dotcom on it, investors thought it would be worth a fortune even though none of these stocks, none of these businesses had any net income whatsoever, and most had no revenue.

Then most recently you had the US housing bubble, which we all know blew up about 2007 and 2008. Once again, people put huge, wild values on houses simply because hey, they heard the house prices are going up, I better jump in there and speculate too.

What do all these have in common, all of these great bubbles of the past? Well, what they have in common is they're not based on any tangible measure of value, exactly what Mark Cuban is trying to tell people is the right way to invest. Let's investigate Mark Cuban for a minute. I lived in Dallas back when mark Cuban sold to Yahoo., all they had to offer was they had a license to put on the internet college basketball games. As I recall, that was about it. The company really had almost no net income, but yet Yahoo for some bizarre reason thought it was a hugely valuable niche and they paid about $5 billion for It's not talked about much, but I've heard through the grapevine through various people, years later they went to sell and it only brought about $10 or $20 million, which makes it probably one of the great purchase collapse disasters in history. They literally lost almost every penny they put in to Mark Cuban's

So of course when that's your background, when you can sell something that has no net income to some fool for a huge price, you would then I guess imagine that you've unlocked the atom on investment, that's what you do. But that's not what you should do. When you speculate, you take enormous risk. If you look back on those bubbles, people made money in all of those bubbles. Someone made money in Dutch tulip bulbs, the South Sea bubble, US stock market collapse, all of these various things there was someone who made money at the same time people were losing money. That's how all speculations begin and end. There is the fool and then there's the greater fool who buys the fool out at the even higher price.

But the problem is you don't want to fall in to any of those categories. You don't want to be the fool or the greater fool. Instead, you need to stick with investments that tie back to some kind of tangible value, and one that's based on math, not on speculation. Of course, the answer to that is any type of investment that ties back to income. I don't care if it's mobile home parks or storage units, or what you want to do. For the love of heavens, tie it back to something that's income generating so there's at least some barometer of when things are completely out of control.

Now a mobile home park or any income property formulates its value on the basis of the amount of income it produces. Now there can be a little extra on that. You can have a little bit of a bubbly nature. You might look at a mobile home park and you might say, "Well, that stream of income to me is more valuable, so I will pay an even lower cap rate for that stream of income." But at least there's a stream of income. There was no stream of income in any of those six world record bubble collapses we talked about. None of them. None of them had any income in it. So at least when you have income, if there is some form of bubble it won't be too bad. It will be survivable because the prices can't get too out of whack, because unless the income goes up tenfold the value cannot go up tenfold.

Let's look for a moment at how mobile home parks are valued. If I go down and I have an appraiser appraise a mobile home park, what do they look for? They typically look for three elements. Number one, the cost basis, kind of the replacement cost. What it would cost to build that mobile home park to begin with. We all know that to build a mobile home park today costs about $15-20,000 per lot, plus land, plus soft costs. Soft cost in some markets can be a lot. There's some parts of Colorado for example that the tap fee, which is the right to connect to the city water/sewer, can be $25,000 per space. But they look at the cost basis of building the mobile home park. Then they reflect on the comparable basis based on comparable sales. What did other mobile home parks in that same vicinity sell for recently? What did other ones that might not be in the same vicinity but in a similar kind of situation, what did those sell for? Then finally, they look at the income. They then do the final valuation or at least ponder their final decision on value based on the income that the asset produces. At no time ever are they basing this on speculation. They're not going down and asking the man on the street who knows nothing about assets what the value is.

So unlike Mark Cuban's concept that it's what people believe it is, no, no one is asking what people believe it to be. People are very uneducated about investments. The average American knows very, very little about what they're doing and they just follow the herd. They just jump right in with the masses and they go right off the side of the ravine. But mobile home parks, there's always this grounding of values because typically mobile home parks require debt to buy one, and bankers are not fools typically and they want to see a tangible value that backstops them when they inject that capital in. remember, the bankers whole theory on life is before you can have return on capital, you have to have return of capital. That means very much about capital preservation.

So the bottom line to all this is very, very simple. You're going to see and you're going to hear right now all kinds of people talking about the fact that hey let's come up with a new idea on investing. Let's cut loose this whole nonsense about it being grounded to anything. Let's just make it whatever people want it to be. Why do they do that? Because that bolsters the value of their investments. They want to brainwash you that suddenly the widget that was worth a dollar today will be worth $100 tomorrow, because they own widgets and they want to sell you widgets. Don't fall for that game. Don't listen to all this nonsense that you're seeing right now in the media. Never in American history has anything ever gone well based on such a shaky foundation. Don't read quotes by Mark Cuban. Read quotes by Charlie Unger, Warren Buffet's business partner. He's been writing a lot recently that what he's seeing right now scares him to the core. He's never seen people acting so ridiculously regarding their investments.

 People are beginning to see investments kind of just like a video game. They're not looking at inherent value. They're not looking at income. They're looking purely at speculation. They're thinking that what they're doing is basically just buying stocks in the same way that they would gamble in Las Vegas. This kind of casual approach never has a happy ending. Unger predicts right now, he knows we're about to collapse, he just doesn't know what day and what time it will occur. I think many other smart investors and most world economists predict we're going to have a major recession/depression over the next one to two years. When it occurs, it's all going to be ramrod through on anyone who listened to Cuban and this concept. Because this concept that value does not tie to anything is exactly what leads to all of these world bubbles. You don't want to be in a bubble. None of us want to be in a bubble. We want to be smart investors.

So the bottom line to all this is invest in things that have income. Tie things back that have tangible math behind the value. Do not invest in things just because everybody else is. And never for one time think that an asset can maintain a high value unless it is supported by some kind of backstopping income. This is Frank Rolfe, the Mobile Home Park Mastery Podcast. Hope you enjoyed this. Talk to you again soon.