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Wednesday, June 30

My Frugal Miser's Best Advice I've Received - Patience

This week I want to explore more of the advice I learned from Warren Buffett and Charlie Munger. I thought I would start with a very important piece of advice and one that I struggle with:

Be patient and wait for the right opportunities.

Have you ever had a friend who, as soon as they had some money, it was as though it was burning a hole in their pocket? I know a lot of people like this. It doesn't seem so bad at the time - they splurge like the world will end tomorrow. But then comes the hangover. An unexpected bill arrives and they have no money to pay it. How to pay it? Do you get a payday loan? Do you pay it late along with the late fees? Do you borrow from a friend? You know, the friend who always bails you out? They don't mind, do they?

Similarly, I've known a lot of investors who just hate to have cash in their brokerage accounts. I really struggle with this personally. Instead of investing in a mediocre business (or, for me, a "so-so" rental property), keep your cash in a money market account and wait. Wait for that investment or property that SCREAMS AT YOU TO BUY. You'll feel like that opportunity will never arrive - I sure do. But just as you are about to give up, opportunity knocks.

In the spring of 2009 there was a foreclosed condo I had my eyes on. The other units have sold for as much as $75,000 in the past. The most recent sale was for $65,000. All the condos were identical, which made for easier comparison. When I first saw it, the listing on the HUD foreclosure site was for $40,000. I took a look at it, but it was too rich for my blood. After it sat on the market for a while, HUD got aggressive and cut the price to $20,000. I saw opportunity and placed a bid for $18,500. Unfortunately, another potential buyer placed a bid for $30,000 under the assumption the low price would attract several competing bids. Of course, I lost to the higher bidder. At least I thought I did.

A couple months later I got a call from my agent. He asked if I was still interested in the condo. Confused, I asked him what he was talking about. Apparently the high bidder couldn't line up financing and his offer ultimately was rejected. As the second highest bid, HUD was willing to accept my offer.

That condo is my cash cow. It needed very little work. I spent something like $2,000 in repairs and upgrades. After expenses, I net about $350 per month on my $20,500 total investment. That's a 19% annual return on my investment, and it doesn't include any appreciation in the value of the condo.

Opportunities will come around when you least expect it and you have to be prepared when they do. A lot of people get antsy when they have cash sitting around to invest and feel they have to do something with it. Smart investors sit on the cash until they need it for the right investment.

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