There is a great series of YouTube videos of Warren Buffett speaking to the University of Florida’s MBA class. Part 1 has a great discussion about integrity and why it is fundamental for success. I found one of the most interesting segments (shown above) to be Buffett’s discussion of the rescue of Long Term Capital Management (LTCM). LTCM was a hedge fund that went belly up in late 1990’s and was rescued by a massive industry bail out, supervised by the United States Federal Reserve. Buffet speaks about how LTCM was run by 16 exceedingly high IQ, long term veterans of the investment markets that probably had a combined 300-400 years worth of experience. Buffet makes a fundamental interpretation about risk and how much is too much. He spoke to how these men foolishly risked their own livelihood when he stated, “To make money they risked what they had and needed for what they didn’t have and did not need.”

After watching this segment I began to think philosophically about how the destruction of LTCM was a smaller scale bail out that sounded very similar to our current credit crunch and massive US bail out. Both instances were caused by some of the smartest minds in their industries. Both ended with the destruction of businesses, where owners risked everything (including the jobs and the livelihoods of others) to gain much of what they did not need to be a viable business in the first place. Is greed the best word to describe this kind of behavior?

Buffet also spoke about how knowledge can create blindness. For instance, in the case of LTCM the owners were experts at mathematics, which blinded them to the simple fundamental human and business concerns that all businesses must acknowledge. I have seen this in my own industry, where some of the brightest have let their intelligence get in the way of their own ability to make prudent decisions surrounding real estate investing. I have also seen many others avoid this pitfall, by living in a mood of wonder. I have seen how part of success is an awe-inspiring willingness to learn more and explore new possibilities, while thwarting moods of over informed arrogance. There is also something to Warren Buffett’s ability to be explicit about the offers, actions and investments he makes and how he rarely relies on inexplicit decisions. We should all be mindful that the philosophies we hold directly influence the actions and practices we live in.
 

As we are watching the Federal Reserve lower the Federal Funds rate to 1/4% and witnessing the Federal Government give away 700 billion tax payer dollars I have encountered many economists (and Dan Green) that are speaking about the fears of future inflation. In this context, I just read an interesting posting called The Inflation Factor written by Doug Short. Posted on the macro economic blog The Big Picture (that I suggest and frequently read), this article is an interesting prospective on how inflation could effect your retirement.

More pertinent to residential real estate, this article takes a look at how inflation affects our individual financial situations. It is very interesting to note how inflation can change your perspective about your home mortgage. As the posting states “…inflation is the main reason why a long-term fixed expense like a mortgage payment goes from a major burden to a minor nuisance.” Inflation is just another example of how purchasing real estate is a part of your entire financial plan. Inflation is market mechanic that no one individual can control, yet it can drastically effect how your future turns out if you do not factor inflation into your entire strategic financial plan.

Note, that Dan Green’s article Explaining What Happened At the Fed (December 16th, 2008) is interesting speculation that the current financial regulation that is occurring in the US will probably keep rates low for the short term, but will also most likely spur inflation that will make rates rise in the long term. This means if you are considering a refinance, now might be an opportune time. If you are considering buying real estate this might also be a window of opportunity.