The Tycoon Report

Is Buffett Buying Homebuilding Stocks Already?

Wednesday, July 25, 2007 | Dylan Jovine

Editor's Note:  Mr. Munson is back!  For you longtime Tycoon Report readers, you'll recall this story from our early years.  But this time there's a twist:  Charley's predicting a housing market rebound.  And he's got Warren Buffett in his corner ... or does he?

THERE'S USUALLY ONLY ONE TO A VILLAGE ...

No, I'm not talking about the village idiot.

Nor am I talking about the village moron.

Today I happen to be talking about the village "Munson."

Not quite familiar with the term?  Let me explain:

In my group of friends, the village "Munson" is the kind of guy who ...

ALWAYS spills ketchup on his shirt, no matter how hard he tries not to.

ALWAYS bets on the wrong horse, even though he personally knows the owner of the racetrack.

NEVER made a penny in the stock market, but SWEARS up and down that he told everyone he knows (including you) to buy Microsoft at the IPO ...

PLAYS lotto every single day of his life, and truly thinks it's his "lucky day" if he wins back HALF of what he paid for the tickets.

Yep, you know exactly who I'm talking about - the good-hearted guy you love like a brother, even though you won't let him ANYWHERE NEAR your baseball card collection.

Usually there's only one Munson to a village.

But as luck would have it, I happened to grow up right next door to an extended family of them.

And though I'll never go to a Yankee game with him again, I can honestly say that I became best friends with one of them.  I'll call him Charles.

For almost 15 years, like clockwork, Charles has called me every single day the stock market moves by 100 points or more.

It started back in 1987 ...

We were literally cleaning lettuce heads from the highway (his father was a trucker and had an accident with a load of produce) when, between shouted obscenities from the passing motorists, we heard the news - the DOW had cracked 500 points.

Maybe it's some weird Dr. Phil type thing that involves his father (who is no longer a truck driver), lettuce, and me, but from that point on it was habit.

In 1998, he called me on the day of the Asian meltdown and told me to sell every stock I owned and go into business with him.  Fortunately, I declined the business invitation and to decided to buy stocks.  Within weeks I was up over 60% just on my blue chips!

In early 2000 - on the very day AOL bought Time Warner - Charles called me up and said, "Dylan, this market is going right to 20,000!"  I immediately hung up the phone and sold every stock I owned.  You know what happened next.

From September 2001 to the Iraq war in 2003, Charles argued with me almost every single day, telling me to "get out of the business" because there was "no future in it."

I knew that what really bothered him was that I was on Wall Street when it happened.  But with the market selling at 16 times earnings, nothing was going to stop me from getting paid.

I even pleaded face to face with his parents.  I told them that opportunities like this don't come along very often.  But they're Munsons - they had no idea what I was saying.

Of course I trounced the averages in 2003, gaining 66% on my money versus 23% or so for the S&P 500.

Yup, so it wasn't such a surprise that Charles called me just Friday to discuss the market's 125 point drop.

What was a surprise was that instead of calling about the market drop, he was calling about a particular stock.

And what we discussed is chocked full of lessons for individual investors.

Here's how it went down:


MY FRIDAY 4:01 PM (ON THE DOT) CALL WITH CHARLEY "MUNSON"

MUNSON (curiously, excitedly):  What's Up Chief?

ME (reading an email):  Nothing much, what's up?

Long Pause.  Silence.

MUNSON (sounding concerned for my well being in the face of such "devastation"):  You OK?

ME (getting annoyed):  Yeah, why wouldn't I be?  The market dropped less than 1% dude.  That's nothing.

MUNSON (cutting me off/not interested in what I'm saying):  Did you hear that Buffett is buying Hovnanian Enterprises (SYM: HOV)?

ME (resigned to my lot in life as his friend):  Yeah Charley I did.  What's your point?

MUNSON (suddenly dead serious):  I just loaded the boat.  Bought the stock at $16.  It's now at $16 1/2.

I could tell he was very proud of his "big" win.  Once a Munson always a Munson.

ME (asking for it):  Why on Earth did you do that?  It was just a rumor dude.  Throughout my entire career I don't think one of those "Buffett's buying stock in XYZ" rumors has EVER been true!

MUNSON (completely ignoring me):  I'm bullish.  I think the builders have bottomed.  The housing market's gonna rebound next year.  If you get in now you'll make a killing.

It was clear he was quoting the National Association of Realtors or another group who has an interest in stabilizing the market.

ME:  But Charley, every builder I read about these days is saying that they don't know where the bottom is, and they're all announcing bad earnings.  Look at DR Horton (SYM: DHI), Beazer Homes (SYM: BZH) and even Home Depot (SYM: HD).   Everyone involved in that business is watching their business suffer.

MUNSON (really trying):  If things are so bad, why does Carl Icahn have a $22/share bid on the table for WCI Communities (SYM: WCI)?

He had me there for a moment.  The truth is that I was never really sure why Icahn made that play.

ME (proud of my comeback):  But WCI stock is at $12.95.  If the Street thinks the Icahn bid is for real, why is it trading almost $10 below his offer price?

MUNSON (uninterested in reason):  But I'm convinced WCI will trade higher and I'll be above water on that position soon too.

Wow.  Did he just admit that he owned WCI also?  This was getting crazy.  It seemed as though he was just cherry-picking facts to justify his pre-determined viewpoint.  And I didn't even bring up what was happening with Bear Stearns (SYM:BSC) and what some folks are calling the "sub-prime meltdown."

ME (taking the time to actually explain it):  Think about it this way Charley ...

Real estate has returned, on average, 25% per year for the past five years or so.  That's double its average annual rate of return for the past 100 years.  If history is any judge, that means that real estate prices will return to their long-run average rate of return.

To do that, one of two things has to happen.  Either real estate prices have to fall dramatically, OR they go sideways for a decade or so.  And to me it seems like the former is happening, not the latter.

If you ask me, I think you should be a bit more patient before you start investing.  There are easier ways to make money.

BUT MUNSON WASN'T ASKING ME ANYTHING, AND WE BOTH KNEW IT.

After a short pause, Munson began to go on and on and on about the opportunities he saw coming in the real estate market.

As I feigned attention (and smoked away), I couldn't help but think of Ben Graham's story about Mr. Market.

Here's the story as re-told by Mr. Graham's most famous student, Warren Buffett:

"He (Graham) said that you should imagine market quotations as coming from a remarkably accommodating fellow named Mr. Market who is your partner in a private business.  Without fail, Mr. Market appears daily and names a price at which he will either buy your interest or sell you his.

Even though the business that the two of you own may have economic characteristics that are stable, Mr. Market's quotations will be anything but.  For, sad to say, the poor fellow has incurable emotional problems.

At times he feels euphoric and can see only the favorable factors affecting the business.  When in that mood, he names a very high buy-sell price because he fears that you will snap up his interest and rob him of imminent gains.

At other times he is depressed and can see nothing but trouble ahead for both the business and the world.  On these occasions he will name a very low price, since he is terrified that you will unload your interest on him.

Mr. Market has another endearing characteristic: He doesn't mind being ignored.  If his quotation is uninteresting to you today, he will be back with a new one tomorrow.  Transactions are strictly at your option.  Under these conditions, the more manic-depressive his behavior, the better for you.

But, like Cinderella at the ball, you must heed one warning or everything will turn into pumpkins and mice: Mr. Market is there to serve you, not to guide you.  It is his pocketbook, not his wisdom, that you will find useful.

If he shows up some day in a particularly foolish mood, you are free to either ignore him or to take advantage of him, but it will be disastrous if you fall under his influence.

Indeed, if you aren't certain that you understand and can value your business far better than Mr. Market, you don't belong in the game.  As they say in poker, 'If you've been in the game 30 minutes and you don't know who the patsy is, you're the patsy'."

As I listened to Charley go on and on about the big things he was working on, I began to think:

Poor Charlie Munson ... I guess he'll just never get it.

And then it dawned on me: Did Ben Graham have his own friend named Charley Munson?

I mean, all you have to do is replace "Mr. Market" with "Mr. Munson" and it's perfect!

Maybe Graham knew his father?  I mean they are a huge clan.  I'll never really know ... hmmm.

What makes me a bit sad, though, is that my good buddy Munson will always sell when he should buy, and always buy when he should sell.

And in my line of business, that's what separates the amateurs from the professionals.  I almost hate to say it, but the truth is that investors like Charley are our bread-and-butter.

When the Charleys of the world are in a panic, we're out buying the stocks that they're selling too cheap.  When they're sitting on the sidelines scared to act, we're at our most aggressive.  When we see action like we've seen for the past couple of weeks, we're positively giddy.

Fortunately for Munson though, in my circle of friends, if one of us has money, that means all of us have money.  That means poor ol' Charley will never be at a loss for Knicks tickets when I'm in town.

Unfortunately for him, my generosity will never get him into Yankee stadium ever again ...

The last time I got us tickets was during the 2004 playoffs against the Boston Red Sox.

And you know how that ended.


DO YOU KNOW YOUR OWN MR. MUNSON?  CLICK HERE TO SHARE YOUR MR. MUNSON STORY!

Related Articles:  Analyzing Buffett's Largest Stock Purchase in Years, Beware of Sub-Prime Mortgage Stocks, Trade Your Home ...

Dylan Jovine
Chief Investment Officer
The Tycoon Report