Remember the container ship that got wedged in the Suez Canal in March 2021? Within days, hundreds of ships halted. In less than a week, 12% of global trade halted.
This is merely one simple example of volatility. A tiny event in some remote corner of the world made life perilous and unpredictable for a billion people. The shockwave reverberated across the Earth.
There are many more examples like this. COVID-19 spawns in Wuhan, China, and creates a once-in-a-100-year worldwide pandemic. Or more theoretically, one butterfly flapping its wings spawns a hurricane on the opposite side of the globe.
Volatility Is The New Normal
Interest rate hikes these past 18 months may not look like volatility. Rates consistently rose. But if you look at a graph of interest rates over decades, it looks more like volatility. Many syndicators and investors were lulled to sleep by historically low rates for a long time.
You can’t avoid volatility. But you can avoid many of its consequences. How? There are three things to keep in mind:
- Broad diversification
- Rigorous due diligence
- Long holding periods
No one we know of has done this better than Warren Buffett. And that’s why he’s one of our investment role models.
Here’s a look at each of these concepts.
Broad Diversification
Berkshire Hathaway is broadly diversified across various asset types, geographies, operators, and strategies. And the company has positions in multiple locations in the capital stack.
If you’re a passive real estate investor, we believe you should consider diversifying across various asset types, geographies, operators, and strategies—and even consider various positions in the capital stack.
My fund has been putting our advice into practice. Here is a picture of our current asset mix:
And here’s a picture of where our funds are invested within the capital stack:
