If You Invested $10K in This Warren Buffett Real Estate Play 3 Years Ago, You’re Down 70%

If You Invested $10K in This Warren Buffett Real Estate Play 3 Years Ago, You're Down 70%

Key Points

Warren Buffett invested early on in Seritage Growth Properties.

Buffett’s Berkshire Hathaway followed up by giving the REIT a large loan.

This turnaround play is now looking at strategic options, with its stock down some 70% during the past three years.

There’s one very important thing you have to get used to if you decide to be an active investor: You will make mistakes. It is inevitable — even some of the best investors in the world do. This is why it’s notable that investors who followed Warren Buffett’s lead on Seritage Growth Properties ( NYSE:SRG ) three years ago have now lost about 70% of their capital. Here’s what’s happened. A rough beginning

Seritage Growth was created by troubled retailer Sears Holdings . The real estate investment trust (REIT) was basically a way for Sears Holdings to sell some of its properties in an attempt to raise the cash it needed for its recovery efforts. That meant that, from the start of its life, Seritage was also a turnaround story, given that its largest tenants were struggling Sears and Kmart stores. Image source: Getty Images. The goal was for Seritage to get out from under these nameplates by redeveloping its properties and renting them to other, more desirable tenants. Given enough time, that actually would have been a decent plan. Indeed, as the REIT revamped its assets, it was able to raise the rents it charged as it brought in new tenants.

Warren Buffett liked the story so much that he actually bought shares for his personal portfolio. However, redeveloping a large portfolio of assets takes time and money. And it turned into a race, because Sears Holdings’ turnaround didn’t go well. In fact, it eventually went bankrupt . Berkshire to the rescue

Shortly before Sears sought out court protection from creditors, however, Buffett’s Berkshire Hathaway ( NYSE:BRK.A ) ( NYSE:BRK.B ) stepped in and provided Seritage with a loan. That basically gave the REIT a lifeline that it could tap as Sears and Kmart stores became deadweight. After taking that capital infusion, Seritage was basically beholden to Berkshire Hathaway .

To be fair, Berkshire Hathaway is a fairly benevolent business partner, so this isn’t such a bad thing. But the business environment changed again, and quickly, in 2020, as the coronavirus pandemic spread around the world. Suddenly retail assets were more problematic to deal with as consumers quickly shifted toward buying online. The assets Seritage owns no longer looked as attractive, and its prospects for finding new tenants diminished.

The stock tumbled and, unlike many other REITs, the shares simply haven’t recovered. It is still down about 70% during the past three years, which means an investor would have lost about $7,000 on a $10,000 investment. SRG data by YCharts On March 1, the company said that it was examining strategic alternatives, including the sale of the company. That effectively means it has given up on the turnaround effort and is looking to salvage some value for investors. The stock rose on the news, but not nearly enough to make up for the losses since the pandemic. Even great investors make mistakes

Seritage is just a rounding error for Warren Buffett and Berkshire Hathaway, so it will have very little impact on them and their long-term performance. For individual investors, however, the pain could be much more significant.

That’s not to suggest that Seritage’s story wasn’t reasonable, because it did have merit. In fact, it was even attractive. Only things changed and what was once a strong story turned into an ugly one as the company lost the race between redevelopment and outside forces (specifically, Sears Holdings’ demise and a global pandemic).

There are three big takeaways here. First, don’t blindly follow any investor, even ones that are canonized by Wall Street; they make mistakes just like the rest of us. Second, even good ideas can lead to bad outcomes; it’s just the randomness of life. And, third, give yourself some leeway for error, both emotionally and financially; diversification is important for a reason. You are just as imperfect as the rest of the human species, and it’s OK. Where to invest $1,000 right now

Before you consider making any real estate investment, you’ll want to hear this.

Our team of real estate experts and analysts at The Motley Fool just revealed what they believe are the top 5 best REITS under $49 for individual investors right now… and they’re giving the report away for free.

Over the last 20 or so […]

source If You Invested $10K in This Warren Buffett Real Estate Play 3 Years Ago, You’re Down 70%

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