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The Mr. Weissberg Lesson

I recently received an email inviting me (and countless others) to attend a conference on the topic of Distressed Investing.  The letter was somewhat apologetic, saying that with the high prices of US assets and the general scarcity of distress in the market dealmakers are finding it hard to invest.  The letter then went on to say the words that should make investors shudder:  “But there are profitable opportunities for those who seek them out; and many managers are moving outside of their conventional investment profiles to find them – in the energy sector, in retail, or in Europe.”

In one of my first jobs after school I had the good fortune to work for a small bank in Burlingame, CA that was controlled by a very savvy older man named Lawrence Weissberg.  I will never forget my first deal presentation to him and the investment committee, which was for a construction/mini-perm loan on a mixed-use project in Bethesda, Maryland.  Before I got too far into the projections and pretty pictures, Mr. Weissberg shot the deal down dead.  He explained his rationale by asking the questions:  “Why is it that we, little Homestead Savings of Burlingame, are so fortunate to receive this wonderful opportunity?  How is it that it bypassed all the lenders in the DC area, then the NY area, then the SF area, to find its way to our doorstep?”

Surely, there are markets that do get dislocated and are in need of major transformation that only outsiders can bring.  I’ve been a part of those myself and those moments have proven very lucrative.  However, most markets that appear to be very opportune to the untrained eye are that way for a good reason, and what may appear attractive is not in fact so.

This conundrum of investors being forced to pursue higher risk strategies in order to have a hope of earning adequate yields highlights one of the fundamental shortcomings of the investment world today. In our artificial and gimmicked ultra low rate environment, retirement savings that requires a return of nearly 7-8% must gamble more than invest in order to have a hope of providing retirees with the lifestyles that they hope to have in retirement.  Thus, many billions of dollars of capital has been allocated to investment funds that allow for, and perhaps even encourage gambling rather than investing. I fear that as a consequence of central bank monetary policy many people will be forced to enjoy one rather than three square meals per day in their golden years.

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