Sam Jones has Lahde Capital’s month-by-month performance results for 2007. The flagship real-estate fund, which has already been wound up, returned 870% over the course of the year, which implies that it went up in value by more than
77% 21% per month, every month, compounded. Except here’s the interesting thing: the fund only had two five months with a gain of more than 77% 21%, and in fact in four of the 12 months it posted a loss.
The key to Lahde’s enormous gain, it seems, is the 97.3% return that the fund posted in October.
That 97% might not seem a lot more than the average 77% needed to get to the annual result, but it turns out to be crucial, largely because it came late in the year, after the fund was already up substantially. Let’s say you invested $1 million in the fund on December 31, and cashed out $9.7 million one year later: of that $8.7 million gain, fully $4 million – almost half – arrived in the single month of October.
Lahde is also a compelling letter-writer. Here’s what he has to say about commercial real estate:
The Wall Street Journal published an article on February 22, 2008 regarding the CMBX. Part of the title was a quote from someone, “[It] doesn’t make sense.” The person quoted was referring to the dramatic drop in prices for virtually all CMBX indices, absent any significant losses surfacing, yet. I’d like to use an analogy from Peter Schiff’s book. If the commercial real estate market was a beach ball, picture my arm holding the ball. If I take my arm away, everyone knows that ball will fall to the ground. However, many foolishly believe that somehow if you take cheap financing (my arm) away, the ball will remain afloat. Risk premiums for this type of debt have skyrocketed as exhibited by the CMBX. If you dramatically increase the risk premium for an asset class, especially one that is so heavily financed, the value of that asset class must fall. End of story.
The losses will materialize. Admittedly I don’t have a clue how severe the losses will be. I don’t have a model that can correctly predict all the variables. Luckily no one else on the planet has such a model either. I gave up on the ability of models to correctly predict the value of securitizations a few years ago. I do know one thing though. It is safe to assume a market is dead when deal volume falls to zero, as was the case with CMBS issuance during January 2008.
There are always only three investment decisions – buy, sell or do nothing. The latter being the favorite course of action for myself, as well as others like Warren Buffett. Going back to the “cheap option” theme, there are no cheap options to buy in the CMBX space. Thus, we sit and wait for the next shoe to drop.
Which explains why Lahde’s returns are so concentrated in one or two months. You wait, and you wait, and you have negative-carry trades on the whole time so you’re losing money so long as nothing happens – and then something happens, a shoe drops, and you make a fortune.
Update: Sorry for the innumeracy earlier, I can’t seem to tell the difference between 9.7 and 970.