Wednesday, June 17, 2015

Last week I stayed at the village, it was restful. This past weekend at LeMans for the race, not restful but exciting.


Abbie and Mandy arrive Friday for a month, more later.


The REIT that I've been a managing partner of for a few years is having a minor crisis. When we started out, my partners and I planned to have a fairly boring real estate investment business, we'd buy multi-tenant residential and commercial properties, spiff them up and collect the rents with expansion coming from borrowing against the increased value. My fellow managing partners are comfortable with this.

The recession offered an opportunity to speculate and we took on investors for their capital. Now these investors are seeking a return far greater than collecting rents can provide. It's a challenge that's doable, but my partners are far out of their comfort zone. For me there are unknowns, but I'm comfortable with the risk. We've always made decisions by consensus, but they're paralyzed and can't decide. We'll get through it.



Anonymous Anonymous said...

Having partners in a risky venture with different risk tolerances and different time horizons is always challenging. The reality is that there is no right answer. Sometimes good decisions have bad outcomes, and vice versa. So in this situation, it's hard to come to a landing.

There's some research suggesting that if the capital at risk is less than 1/7th of the overall capital, people tend to be linear. That is, They simply weigh the risks against the rewards with their associated probabilities. If it's a net positive, they're apt to go forward.

Once the capital at risk, however, gets beyond 1/7th of the overall capital, people become increasingly risk averse.

Here's some examples to make the point.

1) Would you pay $10 to win $11 dollars if you got "heads" in a coin toss? Sure, why not.

2) Would you pay $500,000 to win $550,000 dollars if you got "heads" in a coin toss? Unless you're very wealthy, you'd pass. The pain of losing a half million on a coin toss is too much to bear.

Your managing partners need to become intimately familiar with the data, and the risk and rewards.

Good luck.

7:29 PM  

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