In the past decade, I’ve successfully invested as a limited partner in multiple syndications and was part of the team sponsoring an 82-unit apartment complex that has successfully gone full-cycle.
Certainly, market dynamics contributed to the success of these investments, but adhering to proven investment strategies from icons like Warren Buffet, teachings from “The Richest Man in Babylon” and others, were equally vital.
In this blog, we’ll walk through the defining principles that have become The New Babylon Capital Way.
Capital Preservation: Never Lose Money
Rule No. 1: Never lose money. Rule No. 2: Never forget rule No. 1. – Warren Buffet
It’s no secret that losing a significant portion of an investment can have a substantial impact on the future growth potential of your portfolio.
When an investment experiences a significant loss, it will typically require significantly higher returns in the future just to recover the original investment.
For example, a loss of 50%, requires a gain of 100% to recover. The loss could be even greater if you account for the returns that could have been earned in a successful investment.
By focusing on capital preservation, we can avoid such setbacks. At New Babylon Capital, we believe in earning a reasonable rate of return over the long term while protecting the downside and letting the power of compounding work its magic.
Uncompromising Investment Standards
You do things when the opportunities come along. I’ve had periods in my life when I’ve had a bundle of ideas come along, and I’ve had long dry spells. If I get an idea next week, I’ll do something. If not, I won’t do a damn thing. – Warren Buffet
As you get deeper into the world of private investing, you’ll discover there are a million and one opportunities out there. But how do you know which ones to invest in and which ones to dismiss?
One component is understanding your investment criteria and sticking to it. Your investment criteria act as a filter, weeding out the misfits and allowing you to focus on the opportunities that are in alignment.
While this seems like a simple concept, it can be challenging to adhere to in reality.
In some cases, a story or a new idea might be compelling and tempt you to invest, but if it falls outside your criteria (or circle of competence), better to pass on it and sit tight until a more appropriate opportunity comes along.
On the flip side, you might find it challenging to find opportunities that meet your criteria, tempting you to invest in an opportunity with lower returns simply to get out of cash.
In this situation, it is equally important to stay disciplined because in the world of private investing, you are typically tying up capital for 3-10 years, and if a more appropriate opportunity comes your way, you might regret compromising your standards.
For example, look no further than Warren Buffet to see this principle at play. Berkshire Hathaway is known for sitting on billions in cash, sometimes for years at a time, because Warren Buffet doesn’t see opportunities that meet his standards…
But then one day, he finds an opportunity, and boom, that dry powder is put to good use.
Investing Within Our Circle of Competence
The Circle of Competence is another concept popularized by the legendary investor Warren Buffett.
It refers to the idea that each of us has a certain area of expertise or knowledge within which we can make informed investment decisions with a higher probability of success. The circle represents the boundaries of your knowledge and understanding in a particular field or industry.
Here are a few key points about the Circle of Competence:
1. Understanding and expertise: The circle represents the areas where an investor possesses a deep understanding, knowledge, or expertise. It includes industries, businesses, or investment strategies that you are familiar with and can evaluate effectively.
2. Staying within the circle: Buffett advises investors to stay within their circle of competence when making investment decisions. By focusing on what you understand well, you are more likely to accurately assess the risks and opportunities associated with an investment.
3. Knowing the limitations: Equally important is recognizing the boundaries of your knowledge and expertise. Being aware of what you don’t know is crucial in avoiding potentially costly mistakes. It helps you avoid investments that are outside your circle of competence, where you may lack the necessary understanding to make informed decisions.
4. Expanding the circle: While the circle represents your current expertise, it doesn’t mean you should limit yourself to those areas indefinitely. Buffett suggests that investors should continuously expand their circle of competence over time. By learning and gaining knowledge in new areas, you can broaden your understanding and potentially identify new investment opportunities.
5. Patience and discipline: The Circle of Competence emphasizes the importance of patience and discipline in investing. It encourages investors to wait for opportunities within their area of expertise rather than chasing investments outside their circle. By being patient and disciplined, you can make more rational and informed investment decisions.
Understanding your circle of competence is essential for successful investing. It helps you focus on what you know, avoid unnecessary risks, and make better-informed investment choices. It’s important to regularly reassess and expand your circle of competence as you continue to learn and grow as an investor.
At New Babylon Capital our current circle of competence includes:
- Real estate
- Small business
- Professional services
- Online education and community-based businesses
While this may evolve and expand over the years, these are the businesses in which New Babylon Capital currently considers opportunities.
Strategic Partnerships
Business and investing are team sports. – Robert Kiyosaki
It’s crucial to seek advice and collaborate with others with proven experience in a given area to maximize your chances of success.
Even when operating within our circle of competence, it’s naive to believe that one person alone has all the answers. Instead, we seek advice from and collaborate with others who have expertise and experience in certain areas.
For example, while investing in rental real estate is well within our circle of competence, we don’t have expertise in every property type or market within the US. Sometimes we must rely on local experts who understand the landscape better than we do.
In other cases, we look to invest with operators who have experience successfully running certain types of businesses. Another Warren Buffet principle is investing in businesses that have an excellent management team. A good management team can turn a bad deal into a good one, but a bad management team can quickly turn a good deal into a bad one.
Wealth Building is a Long Game: Avoid Get Rich Quick Schemes
When on the journey to build wealth, it’s tempting to invest in the latest trend. However, speculative ventures, such as cryptocurrency, carry a high level of risk and uncertainty – and thus, loss of capital.
It’s wise to be cautious when considering investments that promise quick and significant returns without substantial supporting evidence or a sound investment thesis – focus on investments with a solid foundation, proven track record, and reasonable growth prospects.
This is why you’ll find New Babylon Capital investing in proven asset classes and businesses such as real estate. While they might be “boring”, these vehicles have strong fundamentals that have stood the test of time.
Invest Where You Have An Edge
Your investor’s edge is not something you get from Wall Street experts. It’s something you already have. You can outperform the experts if you use your edge by investing in companies or industries you already understand. – Peter Lynch
Many of the most successful investors focus on investing in industries and markets where they have an edge and the opportunity to generate above-average returns. New Babylon Capital’s edge is in private real estate and certain types of small businesses.
This edge first stems from our direct experience in real estate investing and working within the industries we invest in.
Next, our deep network in the real estate industry, allows us to identify and partner with successful operators with a proven track record of success – and more importantly, avoid the ones that don’t.
Investing in private markets has an edge over public markets as private markets are naturally more inefficient than public markets, at times leading to favorable discrepancies between price and value. Whereas public markets tend to be highly efficient and finding such discrepancies is significantly more challenging.
Interested In Learning More?
Thinking about passive investing? Contact us today.
