How to Lose the Opportunity of a Lifetime

Two investors have to give back $100 million because they were afraid to meet the market

After two “no counter” offers last week, I'm reminded of something I learned in the last cycle:

Don’t chase the market up.

In 2009, a client of ours raised $100 million to buy distressed mortgages. Their timing was amazing, had all the connections and great deal flow.

These were two die hard mortgage guys in the primes of their careers.

And having extricated themselves from the subprime mess unscathed, they raised money from a single institutional player that wanted access to the biggest buying opportunity in a generation.

But they fumbled the ball completely, never deploying a dollar.

Why?

They were too conservative.

If the market bid was $0.60, theirs was $0.55. When the market rose to $0.65, their bid was $0.60.

Behind the scenes, our scrappy little team was furiously valuing properties on their loan tapes, feeding them the best information we could - including that the market was recovering, that capital was coming back in and the “easy” trade was over.

But they stuck to their guns, bidding low.

They chased the market all the way into 2011 before their capital pulled the plug and demanded they return the money.

And they missed what turned out to be the opportunity of their careers.

The lesson here is that if you have conviction, if you know in your bones you have a can’t miss opportunity, don’t get too cute about the buy.

If you're right, you'll never miss those few points.

Commercial real estate people like to say you make your money on the buy. And that could be true.

But if you never buy, there won’t be any money to make.