I just finished reading The Big Short, the book by Michael Lewis which chronicles the demise of the sub-prime mortgage market. In this book, Lewis highlights a few brilliant souls who correctly analyzed the flawed fundamentals in this market and then proceeded to profit handsomely from its crash by selling it short.
One of the investors Lewis features in this book is Dr. Michael Burry, a neurologist turned money-manager who started a firm called Scion capital. Scion eventually made several hundred million dollars by purchasing so-called credit default swaps on sub-prime mortgages. The credit default swaps Burry purchased on mortgage bonds were essentially insurance policies payable upon the default of these bonds. As history has shown us, these bonds failed en masse, and Burry and others became all the richer for it.
Lewis tells us Dr. Michael Burry was influenced heavily by the late Benjamin Graham and a protégé of sorts of Graham's—Warren Buffet. Burry bought in to Graham's philosophy of "value investing," which is essentially a quest to identify stocks of companies which trade below their asset or book values. Presumably it was Burry's passion for value investing that led him to correctly foresee the sub-prime bust.
As I read about Michael Burry and his approach to value investing, I wondered how such a philosophy for picking stocks could be applied to the commercial real estate investment market. Do certain characteristics of a real estate investment suggest it is a poor value and while others suggest it is a good value? Is there a scenario in which a property's "book value" could be higher than its current market value?
If there are fundamentals which could give us some insight into true "value," can they be quantified? Or, are they simply seat-of-the-pants, instinctive, and nebulous sort of criteria that may vary from investor to investor? I may be wrong, but my sense is that most investors don't stop too long to ponder the differences in "value" among certain net leased commercial real estate investments.
What are your thoughts? Give me some feedback in the "Comments" section by providing ways in which you might identify the intrinsic or book value of a commercial real estate investment.
I look forward to your responses!
