Monday, June 18, 2007

I look at the announcement of yet another huge development in the Old Mill District and think, Wow.....just, wow.

The tendency is to think; well, this is big money. They must have done the research. They must know something I don't know. They must know what they're doing.

Not necessarily. I remember watching the AOL/ TimeWarner merger news conference, and thinking....what they said makes no sense. It's all jargon and buzz words, but no substance.

I watched Marvel make one huge mistake after another, until it went Chapter 11. (Someone said later, everyone in the company knew they were going down the wrong path, except the 3 guys making all the decisions.)

I've watched more than one industry for which my livelihood depends, self-destruct, with the major players making the major mistakes.

I've learned to trust common sense.

And the Old Mill District defies common sense.
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4 comments:

Bend Economy Man said...

If you like Harper's magazine, or have access to a copy, in the "Readings" section there's a great transcript in the June issue where Jim Cramer (yes, of "Mad Money") is talking to someone about moving markets. He's talking about how at his hedge fund they would subtly and not-so-subtly make key buys or shorts of stock in a sector as the same stock they wanted to drive up or down, or spread a rumor to get the financial press to speculate on developments in a company they wanted to go short or long on.

Anyway, they guy he was talking to remarked "but this is all market mechanics," meaning that what they did wasn't actually changing whether the companies in question were more or less profitable, it just shoved stock prices up or down based on the human psychology of traders trying to "get ahead" of trends.

And Cramer replies, "oh, but the mechanics are so much more important than the fundamentals."

He's right, of course, from the investor's point of view. The executives at Time Warner (not taking into account their stock options and their bonuses for achieving stock price targets) who were talking up the AOL merger were trying to raise money to do what their company does: creating and delivering media content. Talking up the stock with unintelligible buzzwords about the merger was a means to an end. Of course, for an investor, the increase in stock price IS the end. If you're invested in a stock, it does you no good if a company is fundamentally doing great but its stock is diving due to market mechanics (an example of this would be a well-run homebuilder with a good balance sheet that's tanking along with the rest of the homebuilding industry on some bad subprime news).

In the case of AOL Time Warner, or the Internet stock bubble, or big Bend commercial developments, or promotion of Bend as THE place where Baby Boomers are all going to retire to, the classic market-moving mechanic that gives people confidence, and which Duncan alludes to, is "I don't know how it works, but these people are smarter and richer than me, and I'd rather get in front of this trend than end up behind it."

If you look back at, say, the Internet stock bubble, there's interviews out there with the people behind such tanked enterprises as Pets.com which at one point had like a $750M market capitalization, and they're asked "did you really think that your business model could justify that investment?" and they answer, "well, we didn't know, but we knew that whatever we were going to do, it would be a lot easier to do with a lot of money. We thought lots of synergies could start to happen that we couldn't foresee."

And it's the same with these developments here in Bend. When The Bulletin asks Becky Breeze whether she's worried about selling her luxury condo development down by the Colorado Street bridge, she says, "no, of course not, there is huge interest from wealthy people all over, and anyway Bend is only getting started as a retirement destination for Baby Boomers." She's not a soothsayer, and of course she's speculating, but naturally it's more likely the development will sell out if she acts like she's got an ace up her sleeve than if she says "well, I sure hope it'll sell out, but who knows?"

And I think it's the same for Bend promoters. Much of the self-assured predictions are market mechanics at work. They think if they work the market mechanics, saying that Bend is ahead of a long-term trend of second-home jet-setters, retired executives and highly mobile telecommuters living in rural areas of natural beauty, hey, if enough people buy the hype, soon enough you could have enough people like that living here that some unforeseen synergies will start to happen and the fundamentals will catch up with the mechanics and the prediction will come true.

Of course, the person who's betting on the genius of others is the sucker, the guy who gets schooled. The big difference between the person who bought 2500 shares of Pets.com at the peak and the person who bought a Franklin Crossing condo in March 2006 is that the person who bought the shares has something with no intrinsic value, and the condo has intrinsic value. If he can afford the condo, he's got something that he can consume/enjoy, and eventually, maybe in quite a while, but eventually, he'll sell it at a nominal profit.

But the perennially successful investors like Warren Buffett are those who know they are SMARTER than the people spreading the PR. They recognize an underappreciated asset and buy it, or recognize an overhyped asset and short it. They never fall into the "they're smarter and richer than me, so I'm buying in before I get left out" trap.

June 18, 2007 at 1:38:00 PM PDT
Adam Hadsall said...

I agree wholeheartedly that the old mill district defies logic. I recently moved here from the East Coast, a place where the bulk of commerce is conducted in large, cave-like structures called "Malls", much like small cities in their own right. These "Malls" combine commerce with both functionality and whimsy. (all inside a large air conditioned structure.) Along side distractions such as Superpretzels, and Arcades lay Hardware stores, and Electronics; the basic elements of human survival.

What confounds me about the Old Mill (and to a lesser extent, it's cousins Wagner, and Bend River) is a marked lack of anything necessary to get we humans through the day. Yes, though the main redeeming quality of "O.M." is the Movie theater, one does not judge their tribal leader by the amount of noise he/she makes, or the amount of lights attached to she/he/it.

Aside from the cinemas, what is there? The River itself? EB Games? Red Robin? What keeps this bizzare multi-cellular symbiotic conglomerate alive? WHERE'S THIS BEAST'S DARK HEART?!?!?

Anyway, just like to say that your insight into this, and other growth related issues is a breath of fresh air in Bend, (deny the bad parts) Oregon.

Thanks again, and keep bloggin'!

~Adam (Box #107 in your store)

June 18, 2007 at 5:48:00 PM PDT
Duncan McGeary said...

These "malls" of which you speak....I seem to remember we used to have a couple of those back when Bend was still a real mill town, instead of an "Old Mill" town.

Part of my confusion is that we had a store in the Mountain View Mall for 7 years; and I watched it struggle to ever really gain traction; same with the Bend River Mall.

So...by turning the doors outside instead of inside, they suddenly become profitable?

Huh?

Seems like retail follow the leader. Retail fads. Department store at the turn of the century. Catalog, mass stores like Montgomery Ward; then malls stores anchored by J.C. Penny and Sears; then Outlet malls; then Big Box; then 'mixed' use, and so on. A big fat shell game.

Seems like what really counts is the money INVESTED; not the money returned. I believe that the Old Mill has been brilliant in attracting stores. It remains to be seen if it does any better in the long run than either the Mountain View Mall or the Bend River Mall (or the Outlet Mall, which was the fad model of a few years ago.)

June 18, 2007 at 6:52:00 PM PDT
Anonymous said...

It's all REIT money. It's all a tax haven.

Bend has now become a tax haven. Using the twenty year average in theory the property will return 7%. The commercial will be built, and nobody will care if it even gets leased on a five-year-triple-net, and who cares, the investors get to pass this LOSS of lease revenue back to the investors.

It's a double package, you get the gain, in the long-term, but a write-off year-to-year NOW.

Trouble is all REIT is bought by retirement investors, and when they read about Bend being 78% over-priced, they're going to demand a portfolio adjustment. In 2005 when Bend got #1 appreciation everyone said "I have to have Bend in my portfolio", now they don't look so smart. Everyone will say "I don't want no Bend, in my portfolio".

Game will soon be over for Bend commercial. It's one thing to be sold a tax-haven, and a write-off, its another thing to lose your investment.

June 19, 2007 at 10:30:00 AM PDT

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