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The Real Estate Pawnbroker

By Brian Hunt, Editor in Chief, Stansberry Research
Tuesday, August 22, 2006

At 65 years of age, James Woodford has been called a vulture, a repo man, a loan shark, and worse.

He hasn’t had a real job in over 40 years. But if you conjure up an image of a muscle-bound thug extorting money with a club in his hand, you’re way off base.

You see, James is one of the greatest investors in the country. And contrary to what you might think, James actually performs a great service to society… a service few others are prepared to do.

This is why James is a millionaire many times over... and the reason, wherever he goes, people throw big chunks of money his way to invest alongside him.

In 2002, James moved to Florida to retire… he’d spent his entire working life liquidating bankrupt companies for himself, investing in real estate, and making private loans. His quiet retirement was interrupted when he saw a real estate boom coming to his new corner of the world.

He began buying cheap raw land for development near Jacksonville… acting as the middleman between local landowners and large homebuilders. He made millions as the Florida real estate boom took hold.

Nowadays, James has greatly reduced his exposure to real estate. He’s become heavily involved in what DailyWealth sees as a great business.

He’s become a real estate pawnbroker. Here’s how the strategy works:

Just last month, James lent a man $500,000. The guy wants to acquire more property to grow his business… but was turned down by the bank because he’s already in debt and enjoys living high on the hog. So James was his lender of last resort.

To compensate for the risk of loaning to a shaky borrower, James demands extraordinary terms. He often earns an immediate 3% in loan fees and charges double-digit interest rates. And he makes sure real assets back every loan. In this case, the guy put up his new property as collateral on the loan. James knew the property would sell for $700,000 in a snap, so he’d almost prefer it if the guy defaulted.

The trick with this lending is, you’ve got to know exactly what the collateral is worth… and you can only lend a fraction of its value to create a margin of safety for yourself. James often puts the loan cap at 60% of his estimate of the collateral’s value.

It’s just like a pawnshop operator who’s willing to buy your $1,000 television for $600 and sell it for $800. You get the money you need; he gets paid for taking the TV off your hands.

Our friend and master resource investor Rick Rule follows the same strategy with companies in the commodities sector.

In 2000 - at the bottom of the 20-year bear market in gold - most junior mining companies were close to bankruptcy. Money was tight and sentiment towards gold stocks was terrible. Rick went to every gold conference he could and bought loads of gold mining debt and equity at fire sale prices.

As gold prices rose, the returns Rick earned for himself and investors were astronomical. Rick sums up his style like this:

I don’t think of myself as an investor in the conventional sense of the word… I’m more of a pawnbroker. Companies come to me when they really need money… and they have to pay up to get it. It’s a terrific business.

This statement is the essence of contrarian investing really… and that’s all James and Rick are… contrarians. They take large positions that others can’t bring themselves to take (either psychologically or financially). They step in and buy amongst pessimism from weak and desperate hands. Their interest is always piqued by bad news like bankruptcy and war.

While others see this type of investing as risky… or cutthroat, it’s actually incredibly safe and profitable if you do your homework. It’s also good for capitalism. This way, resources flow to where they’re most productive.

We try to do this everyday in DailyWealth. To point you in the direction others aren’t willing to go… to get you “pawnbroker” returns. It really is the easiest way to get rich with your investments.

Good investing,

Brian

P.S. Aligning yourself with Marty Whitman of the Third Avenue Value Fund (TAVFX) is an easy way to invest with a great “pawnbroker investor.”

Marty is among the world’s best at buying cheap stocks and companies in bankruptcy. There’s also a small Canadian firm called Quest Capital with a wonderful specialized loan business. Check ‘em out.

P.P.S. If you’re looking for a brokerage with specialized knowledge in natural resource investments, you should consider getting to know Rick Rule and his team at Global Resource Investments www.gril.net, phone: (800)-477 7853. There’s no better resource (pawn) broker in the world.





Market Notes


THE BULL MARKET IN MARTY WHITMAN

As we pointed out in today’s essay, investing with Marty Whitman is an easy way to partner up with one of the world’s best investors.

Marty’s mantra at Third Avenue Management is “safe and cheap.” He’ll only buy a security if he sees a huge discount to his estimate of its true value.

Safe and cheap is working. Marty’s fund has averaged a phenomenal 16.6% per year since inception in 1990… and 22% per annum over the past three years.

Right now, Marty is looking to keep up the returns with Florida and Asia. His fund has large positions in Florida land developer St. Joe, Japanese automaker Toyota, and Korean steel producer Posco.

“Safe and Cheap” works… the past three years in TAVFX:



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