October 9, 2009

IFRS implementation in Brookfield Properties

Brookfield Properties (BPO) will adopt IFRS, new accounting standards that most US and Canadian companies will transition into, ahead of schedule according to their press release. You will see most real estate operators opt to adopt IFRS early, particularly those with properties acquired more than 5 years ago. That is because it will decrease their leverage and increase book value.

IFRS allows companies to adopt fair value measures of their assets. It is advantageous for owners with older properties to account under IFRS this way their leverage ratio will be much better. Also I think in this cycle where commercial real estate have been clobbered you will see many years in the future of up revaluation of properties and steady increase in book values.

The accounting changes will move BPO book value from $9 to about $14 making Price/ book value less than 1.

Also they will be compare more favorably now that leverage is reduced. Most analyst do not like BPO because it has higher leverage ratios compared to other office owners.

October 4, 2009

Practice Investing

Investing is just like any other discipline you need practice to develop the skills to be good at it. For awhile I have been thinking about a framework of skills and how do I practice to improve my game. I have broken it down to three elements that need to be developed and worked at constantly:
  1. Knowledge
  2. Skills
  3. Behaviour

If you have read Poor Charlie's Almanac, which I recommend highly, you will see that he harps on what he calls "mental models". This is the equivalent to knowledge in my framework. However, I want to further detail these models into two elements:
  1. Systems Knowledge: similar to Munger's description, it is your knowledge of the necessary sciences to enable you to decipher your way through events, readings and decisions:
    • Accounting
    • Mathematics
    • Psychology
    • Language
  2. Domain Knowledge: Munger did not explicitly break out this element as a distinct "mental model" but he emphasized reading a lot. Domain knowledge is the structure of information and data or "insights" about a specific industry. You can't be knowledgeable sufficiently about several domains so you have to keep your efforts focused on few ones, the less the better investor you will be.
How do you practice your knowledge building capacity? By writing down notes about what you read. What you need to write is not a summary of the information but an answer to the questions: so what? What will be the impact of the news item on you, your business and the companies involved?

To develop the knowledge required, you will need to read and read a lot, this has to be evident by now. Here are the skills that you need to work at as well to be more effective and efficient:
  1. Speed reading: you need to read quickly because knowledge has one limitation and that is time. The skill is hard but you need to work at it to continuously improve the yield on your time by acquiring more knowledge for each unit of time spent.
  2. Memory: what is the point of reading if you can't remember the information you need to analyze a particular situation or identify a unique opportunity. This is a skill that can be improved by practice as well.
  3. Creativity: Munger in his book said to "invert, always invert" well to do so you need imagination. Creativity is needed in order to develop future scenarios and imagine possible risk for business.

I have identified three behaviours or personality characteristics that need to be nurtured as well:
  1. Passion: your passion should be about the process not the outcome. If you are passionate about the process you will think and have perspective on how to improve it rather than use it in a mechanical fashion.
  2. Adaptation: one of the most valuable traits of humans is their ability to adapt to their circumstances and learn from their mistakes. But this require that you take responsibility and internalize errors and mistakes rather than blaming it on chance or others.
  3. Determination: because you will fail but you need a combination of strong will, ambition, and discipline to keep going as what I outlined here is a lot of hard work.

Train hard!!!!