Effective use of capital

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The BBC showed a documentary on Warren Buffett and Berkshire Hathaway last week. It was great. He came across as both down to earth and incredibly insightful.

The man would seem to be as big as his reputation (bigger even!).So, it was amazing viewing. Catch it on iPlayer.The BBC presented it as a series of lessons in Buffettology and the one that stuck in my mind is:
‘Effective and Efficient Use of CapitalWe could all do with some of that and it got me thinking that this is, indeed, a key part of any property investors make up (and probably any investor, given what Mr. Buffett says). We always need to be watching where our money is currently invested and deciding if that is the best place for it. Or could we make better use of it elsewhere?

In fact, this seems to be a recurring theme of Mr. Buffett’s that came over in the documentary.

I also remember this featuring heavily in Roger Lowenstein’s excellent biography of him. Somehow, the magical Mr. Buffett has managed to persuade many of his business managers to relinquish a large portion of the funds their businesses generate back to him, rather than retaining them in their own business. The thinking being that Mr. Buffett is in a better position to determine how to use the money to get the best return.And so to my own business: I’ve been aware for a while that I’m not treating my captial with the respect it deserves and this documentary has brought that into sharp focus. How to improve things in the immediate future? And how to do better next time?

The thing is … I have a lucrative refurb project in the pipeline. And it’s been in the pipeline for AGES. Far too long. So I’ve had money allocated to that project and I haven’t used it elsewhere because each month I think ‘Great, this is the month its going to happen’ and somehow time slips by and we don’t get there. And so it is that since December last year right through to November (yes 11 months!) I have had a good chunk of capital languishing waiting to be put to good use on this specific deal. All the while, it’s been earning … well pretty much nothing.With any luck I’ll be through this particular lesson within a week or two and the money will be hard at work in the new property. Then my attention will turn to the refurb and then to releasing the cash, probably through a loan.

So in terms of the immediate future, I feel I’m at least on the right track.

And next, on to preventing this from happening again? Well here I don’t feel so easy. What to do? Should I be negotiation and agreeing purchases without having the funds available to complete? That sounds risky and a recipe for a quickly ruined reputation. But the alternative is to have the money sitting in the bank while the world takes it’s merry time to exchange and complete on each purchase. Yes, I can do my best to line these up. So that release the equity in my current project co-incides with completing on the next one. But so far that seems tremendously hard. Perhaps that it’s. It’s just hard. But that’s the way things are.

So I’m hoping to get this purchase sorted, and get it turned around fast. Then I can refinance my cash out. And whilst I’m doing that I shall be on the hunt for the next one. Then all I need to do is line them up!


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