I always enjoy going through the investments of Warren Buffett (Trades, Portfolio) and Charlie Munger (Trades, Portfolio) that haven't attracted much attention.
Smaller investments or investments they don't tend to speak about a lot often fly under the radar. However, I think these investments are far more informative and instructional because we can learn more by studying others' losses than we can by studying their profits.
What's more, it is often the case that these smaller trades are likely to be more in line with the sort of size the average investor would make, rather than the multi-billion dollar investments that tend to hit the headlines.
One such investment is described in Charlie Munger (Trades, Portfolio)'s unofficial biography, "Poor Charlie's Almanack: The Wit and Wisdom of Charles T. Munger."
The hotel trade
In the book, the investor noted that "years ago," Berkshire Hathaway (BRK.A, Financial) (BRK.B, Financial) had a "former savings and loan company, and it had made this loan on a hotel right opposite the Hollywood Park Racetrack."
The book does not detail which savings and loan company this was. Still, there is evidence to support the conclusion that this could have been Wesco Financial, the holding company of a small Pasadena-based savings and loan institution named Mutual Savings.
This institution had made loans to developers, which went sour and proved to be a headache for the management, which eventually included Munger. Still, as I noted above, the company's exact name is not disclosed in the text, so we have no way of knowing for sure.
Munger went on to say that the group struggled to sell the hotel because "the neighborhood changed." Gangs took over the area, and no one would come and visit the property. "We foreclosed on it two or three times, and the loan value went down to nothing. We seemed to have an insolvable economic problem," he explained.
The duo eventually sold the property to a buyer who had a unique solution:
"Now, we could have gone to McKinsey, or maybe a bunch of professors from Harvard, and we would have gotten a report about ten inches thick about the ways we could approach this failing hotel in this terrible neighborhood. But instead, we put a sign on the property that said: "For sale or rent." And in came, in response to that sign, a man who said, "I'll spend $200,000 fixing up your hotel and buy it at a high price on credit, if you can get zoning so I can turn the parking lot into a putting green." "You've got to have a parking lot in a hotel," we said. "What do you have in mind?" He said, "No, my business is flying seniors in from Florida, putting them near the airport, and then letting them go out to Disneyland and various places by bus and coming back. And I don't care how bad the neighborhood is going to be because my people are self-contained behind walls. All they have to do is get on the bus in the morning and come home in the evening, and they don't need a parking lot; they need a putting green."
There are some interesting takeaways from this solution. First of all, the partners did not want to spend vast amounts of money on a bad trade. They knew they had to give up on the hotel, so they did. It is also an example of Ben Graham's famous line, "there are no bad assets, just bad prices," in action. There is always a buyer for an asset at the right price.
It is also a great example of how different buyers may place different values on different assets depending on their own experiences and circle of competence. Berkshire could have made the hotel work if it knew how to, but it didn't. Another buyer did, and they made a profit.
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