FoolWatch Weekly – Investing Lessons from Detroit’s Bankruptcy

 

 

 

 

 

 

 

 

 

Ninety-nine percent of the failures come from people who have the habit of making excuses.

George Washington Carver

 

 

Failure of an American City – INVESTING LESSONS FROM DETROIT’S BANKRUPTCY

 

Dear Fools,

As we waited at Amtrak’s New York Penn Station this week for train 2121 back home to Washington, D.C., I decided to take a gamble.

Rather than wait in the main concourse with a handful of other Fools, I picked one gate (Gate 13/14 East) and hoped that’s where our train departed from.

It turns out, I was right. Or, rather, I was lucky.

As one of my Fool investing friends said, “You didn’t diversify your decision. You went all in on this track.”

He was right. I blindly picked a track and headed towards it. Had our train not left from Gate 14 East I may still be waiting it out in NYC.

It got me thinking…

I bet this is the way many novice investors start buying stocks. They don’t diversify. They pick one single stock, maybe after talking to a friend or relative or colleague, and they jump in with both feet.

Of course we know how this often works out: it doesn’t. Most aren’t lucky. Their stock falls, they get discouraged, disheartened, and disinterested, and never look at stocks again.

As my colleague Morgan Housel writes below in his insightful piece about the disastrous financial history of Detroit, just as diversification into different industries is important for cities, it can also be a key tenet for investors looking to ring up solid returns.

That’s why diversification is one of the fundamental lessons we emphasize to individual investors at our flagship investing service, Motley Fool Stock Advisor, where Tom and David Gardner have crushed the market for more than a decade.

I hope you enjoy Morgan’s thoughts about what happened in Detroit and his three investing lessons to take away, including why diversification is important for your portfolio returns.

Fool on,

 

Andy Cross
Chief Investment Officer

In 1948, Secretary of Commerce Charles Sawyer called Detroit’s automobile industry, “a symbol of the way in which the American economy could best provide the average American with a steadily increasing abundance of the things he wants and needs.”

Last week, Detroit filed for bankruptcy.

Pundits this week pointed fingers at a city that promised too much, spent with abandon, and relied heavily on a single industry. They cite a poorly run government, myopic city planners, and even fraud. In most cases, they are right.

But the largest driver of Detroit’s demise is a simple, startling fact: the city’s population declined 65% in the last six decades. No city can survive such an exodus; it’s actually amazing Detroit’s finances lasted this long.

The Motor City was home to 1.9 million people in 1950, at the time nearly identical in size to Los Angeles. Today, 700,000 inhabit Detroit, or less than a fifth the size of L.A.

That works out to 2.2 people leaving Detroit every hour, 24 hours a day, for the last 63 years.

If the number of people who left Detroit in the last sixty years formed their own city, it would be the nation’s ninth largest, ahead of Dallas, Texas.

The financial woes linked to Detroit’s shrinking population have been known for decades. A 1991 article in the Times-News was prescient: “Detroit’s population loss could be financial disaster,” it wrote.

And Detroit tried to avoid its fate. Total city spending was cut by more than $1 billion, or 33%, between 2006 and 2010, including a 77% reduction in “recreation & culture” spending, a 72% cut in capital outlays, a 41% reduction in spending on roads, and a 44% cut in “health & welfare” spending.

If the number of people who left Detroit in the last sixty years formed their own city, it would be the nation’s ninth largest, ahead of Dallas, Texas.

But the city made pension promises during a period when its taxpayer base was more than twice the size it is today. With an unemployment rate of 16% — more than double the nationwide average — there is a shrinking base of workers left to tax. And with a median income of $27,000, or about half the nationwide average, those who are employed have little income to tax. According to Detroit News, nearly half the city’s 305,000 properties didn’t pay their tax bill last year. Seventy-seven city blocks had only one owner who paid property taxes in 2012. You cannot run a city like this.

What Detroit’s fall means for investors may be more symbolic than direct.

Investors hold some $1 billion in Detroit general obligation bonds, and $5.3 billion of bonds backed by the city’s water and sewer revenue. That’s barely a rounding error in the $3.7 trillion municipal bond market. And not all of Detroit’s bonds’ value will be lost; part will be recovered post-bankruptcy, and parts are backed by bond insurance companies. The direct investing fallout from the city’s bankruptcy is nil.

Symbolically, Detroit teaches us three things about investing.

First, Detroit shows how organizations that can’t adapt eventually crumble.

Before it was a technology hub, San Francisco relied on shipping, and before that, gold mining. Before New York was the financial capital of the world, it was the garment capital of the world. Detroit enjoyed the auto boom, but never found its second act.

Adaptation is a key trait to any organization’s survival, including companies.  We’re always looking for companies that adapt to changing circumstances. Amazon (Nasdaq: AMZN) started as an online bookstore and adapted into the world’s largest store, period. Netflix (Nasdaq: NFLX) started as a DVD-by-mail company and adapted into a streaming video service. History provides two constants: change, and punishment for organizations that don’t adapt to change.

Second, Detroit provides a sad lesson in the need to save for one’s self. Tens of thousands of retired Detroit public workers wait anxiously for word on if, and how much, their pension benefits may be cut. Their story may not be unique. According to Credit Suisse, 97% of S&P 500 companies with pension plans are underfunded. The Congressional Budget Office wrote in 2011 that, “By any measure, nearly all state and local pension plans are underfunded.” The hard lesson is that you can only truly rely on one person — yourself — to save for retirement and look after your investments.

Last, Detroit was overwhelmingly reliant on the auto industry. When the fate of three companies — General Motors (NYSE: GM), Ford (NYSE: F), and Chrysler — turned, so went the entire city’s fate. Evan Soltas of Bloomberg wrote, “Detroit’s dependence on cars wasn’t exactly the problem. It was dependence itself. Cities should never go all in on any industry, cars or otherwise. It didn’t realize that until it was too late.”

The same mistake often trips up investors. We preach diversification at The Motley Fool because a lack of it can be one of the surest routes to disappointment. William Goetzmann of Yale and Alok Kumar of the University of Texas once showed that the least diversified investors underperform the most diverse investors by an average of 2.4% annually. Things change unexpectedly, and often for the worse. Diversification is the best way to mitigate that risk.

With that in mind, we’ve recently compiled a free report outlining a diverse group of 9 Rock-Solid Dividend Stocks. Over the long term, the compounding effect of these stocks’ quarterly dividend payouts, as well as their growth, adds up faster than many investors imagine.

To discover the identities of these nine companies before the rest of the market catches on, you can download this free report by simply clicking here now.

And remember, stay tuned for more updates on everything investing in next week’s issue!

Foolish best,

Morgan Housel
Contributor, Fool.com

 

FOR FULL REPORT CLICK HERE:  www.fool.com

a little about me and my expertise – video

LAND SPECIALIST – LAND EXPERT – INVESTMENT BROKER – ARIZONA

https://www.youtube.com/watch?v=PPs3kpKR4nY

 

 

Feel free to contact Walter regarding any of these stories, the current market, distressed commercial real estate opportunities and needs, your property or your Investment Needs for Comercial Investment Properties in Phoenix.

 

 

View my listings and my profile at:

http://www.loopnet.com/profile/14101172900/Walter-Unger-CCIM/Listings/

 

www.Walter-Unger.com

www.KLCommercialGroup.com

 

What is a CCIM?

 

 

Please go to my web-site and get all the newsflashes and updates in Commercial Investment Real Estate in Phoenix and Commercial Investment Properties in Phoenix daily

 

www.walter-unger.com

 

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Walter Unger CCIM, CCSS, CCLS

I am a successful Commercial Investment Real Estate Broker in Arizona now for 15 years and I worked with banks and their commercial REO properties for 3 years. I am also a commercial and  Landspecialist in Phoenix and a Landspecialist in Arizona.

1.

WHETHER YOU LEASE OR OWN

NOW IS THE TIME FOR YOU TO EXPAND, UPGRADE OR INVEST.

 

In my opinion we are at bottom of the cycle in Commercial Real Estate in Phoenix, so there is only one way and it’s called we are going up again and now is the time for you to expand, upgrade or invest in Commercial Properties in Phoenix.  The prices on deals I may get you will not be around forever.

 

2.

IF YOU OR ANYBODY YOU KNOW IS IN TROUBLE WITH YOUR BUSINESS, AS MANY AMERICANS ARE IN THE MOMENT, AND ARE ABOUT TO LOSE YOUR COMMERCIAL PROPERTY, PLEASE CONTACT ME.  IF YOUR BANK IS BEHAVING BADLY I MAY BE ABLE TO HELP YOU GET OUT OF SOME OR MAYBE A LOT OF FUTURE HEADACHES.

 

3.

WAITING TO SELL YOUR LAND ? TIMES CHANGE / IT’S TIME

  We barely could give land away the last few years, but times are changing.  Even in those meager years, I sold more land across the state than most other brokers. Before the real estate crash I was a land specialist in Arizona with millions of dollars of transactions, but then I had to change and also sell other commercial investment properties, which was fun, but I am a Commercial Landspecialist in Arizonal, a Commercial Land Specialist in Phoenix and love to sell land, one acre to thousands of acres.

Since I was a Land Specialist in Arizona and a Land Speciaost in Phoenix many of my clients, Sellers and Buyers remember me and now they are calling me again, so this is the time to get back into land and none of my clients, including future clients, will miss out on getting their best deal.

Also, if you are up-side down on your land, like many Americans, and the lender is giving you a hard time, now is the time to put your land on the market. Lenders are making deals now with short sales.  I have been working with banks for many years – I learned how to work with them.

 

If you have any questions about the 1 to  3 above, about Commercial Investment Properties in Phoenix or Commercial Investment Properties in Arizona,  I will gladly sit down with you and share my expertise and my professional opinion in Commercial Properties in Phoenix or Commercial Properties in Arizona with you.Obviously I am also in this to make money, but it could be a win-win situation for all of us.

 

Please reply by e-mail walterunger@ccim.net or call me 520-975-5207 (cell)  602-778-5110 (office direct).

 

www.Walter-Unger.com

 

 

 

Thank You

Walter

 

Walter Unger CCIM

Associate Broker

Kasten Long Commercial

2821 E. Camelback Road, Suite 600

Phoenix, AZ 85016

Cell:      520-975-5207

Direct:   602-759-1202

Office :  602-445-4141

Fax:      602-445-4188

walterunger@ccim.net

 

Delivering the New Standard of Excellence in Commercial Real Estate

 

www.walter-unger.com

www.KLCommercialGroup.com

 

 

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