The Difference Between Dominance and Irrelevance

Introduction

The difference between 50+ years of strong outperformance and a decline into irrelevance is simple. Or at least simpler than you may think. One is the result of riding large shifts in human behavior, technology, or world events. The other is, simply, not.

Spotting macro trends and shifts in the market is the most important job that we can do as investors. No amount of creative financing, quartz countertops, or Instagram posts are going to change the course of larger societal shifts. And the impact of these societal shifts is multiples more than the impact of any property-level strategy or improvement.

The Difference Between Dominance and Irrelevance

There is an important concept of “riding the wave” in investing. Although not often explicitly discussed in real estate, it is one of the more important concepts for long-term investing success. It ignores the micro and focuses on the macro. What are the big seismic shifts happening in the world and which of these changes are cyclical (for example, the cost of debt) vs. secular (for example, demographic changes such as Americans starting families at a later age and declining rate). The goal is to find these changes that are long-term or permanent changes in the world and latch on. No how matter good of an asset that you have, if it goes against the wave of a secular change you are likely going to lose. And conversely, an average idea or property riding the wave can significantly outperform.

The Case of Kodak

Let’s use a business example to illustrate the point. Kodak was a great American company founded in the late 1800s. The company changed the world with its cameras and picture films - cutting edge technologies at the time. It remained relevant and progressive through much of the twentieth century. Its revenue peaked in 1996 at $16B, which is over $30B in today’s dollars. In that same year, it’s stock hit $80.25 on the S&P.

Then came the digital wave.

Rather than jump on the wave, Kodak resisted. The result was that it was sucked into the undertow of the digital wave. Kodak filed for bankruptcy in 2012. A 100+ year company found itself with more debt than assets and needed restructuring. Its stock went to $0.18 before being delisted from the S&P. For those counting, that’s a 99.8% decline in value.

Now let’s compare to the average performance of new technology. We will use the NASDAQ as a proxy for an average investment into the technology waves (primarily adoption of the internet and smart phones) that occurred in the late 1990s and into the early 2010s.

In 1996, the NASDAQ index stood at approx. 1,000. By the end of 2012, the NASDAQ stood at approx. 3,000. That’s a 300% increase for the average technology index vs. a 99.8% decline in value for Kodak. If I were to handpick stocks that were at the forefront of these technological waves during the same time period – Microsoft, Apple, etc. – the returns are 500 – 10,000%+.

That’s the result of a high-performing company missing the wave. And although this is an example focused on the technology waves of the 1990s and early 2000s, there is a real estate lesson here too.

In 1950, the city of Rochester NY was home to 330,000. Once a robust city with a strong base of manufacturing jobs, Rochester declined like many rust belt cities in the second half of the twentieth century. Its largest employers included Kodak (surprise!), Bausch & Lomb, and Xerox. As these companies lost their fastball and/or moved away, the city declined in nearly all important economic and demographic metrics. To pick a few important to real estate:

· The population declined to 210,000 people today (~40% decline)

· 30% of the population is below the poverty line

· The house price index has increased approx. 6x since 1978, not adjusted for inflation (earliest FRED data)

Now let’s compare that to Seattle WA. Microsoft, one of the companies on the forefront of the technology waves discussed above, is located in its suburbs.

· From 1950 to today, Seattle’s population has grown by 60% (half of it occurring since 1990)

· 11% of the population lives below the poverty line.

· The house price index has increased approx. 15 times since 1978, not adjusted for inflation

Was the decline of Rochester and the rise of Seattle entirely attributable to Kodak and Microsoft, respectively? No. But the rise and fall of these companies are emblematic of the entire cities ecosystem and the impacts of these great shifts on the real estate market. I can almost assure you that a great property in 1950 located in Rochester underperformed derelict properties in many areas of Seattle over that same time period. As Seattle’s economy and demographics exploded, the city expanded and property became more valuable.

As I invest in 2024, at prices that are historically elevated, I am looking for the big waves. Where is the path of progress. What are the irreversible trends. How are changes in technology, employment, politics, and family dynamics impacting real estate. It’s easy to get caught up in the minutia of underwriting individual deals – and that’s understandable because it is extremely important. But we need to routinely pick our head up and look ahead to make sure that we are riding the big wave, and not unknowingly being pulled out to sea.

As always, if you found this letter valuable, it would mean a lot if you would consider forwarding this email or sending this link [The Promote: For Real Estate Investors That Outperform.] to at least one friend or colleague that may also benefit from this information. Please feel free to reach out if you would like to discuss any of these topics or have recommendations for future topics.

Articles and Podcasts that I Enjoyed:

A collections of business, real estate, personal development, and technology news and media that I found interesting this month.

Lex Fridman interviews Bill Ackman

It’s hard to pass up an opportunity to listen to legendary investors such as Bill Ackman.

Tim Ferriss interviews Barbara Corcoran

Barbara may known most in the past 10+ years for her role on Shark Tank. But she has a long, great entrepreneurial career in New York real estate. Lots of good stories, tips, and creative ideas for selling real estate and services.

Thanks,

Kyle Joseph