Predicting the future is hard; ask a psychic

In the July-August 2007 Harvard Business Review, Paul Saffo explained in his article "Six Rules for Effective Forecasting" (link) that "prediction is possible only in a world in which events are preordained and no amount of action in the present can influence future outcomes." He goes on to write, "Above all, a forecaster's task is to map uncertainty, for in the world where our actions in the present influence the future, uncertainty is opportunity."

This belief was reinforced in an August 2007 news item from my local business newspaper, the Central Penn Business Journal:

...Business owners between 200-212 N. Second Street in Harrisburg will have to pack up if city officials approve plans for an 18-story office, parking and retail building at that location.

Four businesses would be affected: Cobalt Hair Salon, 2nd Street Psychic, Chilly Willy's ice cream parlor and the Tom Sawyer Diner....

Psychic Angie Tom, who owns 2nd Street Psychic, was in Europe and could not be reached. A psychic who works for Tom said she did not see this coming and could not say what Tom would do in the future.

If psychics can get caught off guard, then we must live in a world rife with uncertainty.

Losing $25 million on Linens 'n' Things

In a profile of real estate investor Richard Baker, the New York Times inserted a brief but instructive mistake story. Baker is now the CEO of Lord & Taylor, and his NRDC Equity Partners focuses on retailing investments.

[NRDC's] first deal was a dud. After losing out to a consortium of real estate and private equity investors on Toys “R” Us in 2005, Mr. Baker and his partners invested $25 million alongside Apollo Global Management, the private equity firm, in its $5.1 billion purchase of Linens ’n Things. They lost their entire investment when the company, a housewares retailer, collapsed three years later.

Richard Baker says the fiasco taught him a lesson. “Where I failed was that if I’m going to invest in a transaction, I need to control it,” he says.

Of course, it's only been a few years since that experience. Perhaps as time passes Mr. Baker will learn that investments that you control can also fail. If that happens (or doesn't happen), it'll be a great story. Stay tuned.

Max Weinberg of the E Street Band: Not doing research in a real-estate transaction

From the April 11, 2008, issue of the Wall Street Journal.

In 1984, [Max Weinberg and his wife Becky] paid $300,000 for a five-acre farm that was part of a development, also in Monmouth County, and learned a lesson that Mr. Weinberg hasn't forgotten.

The Weinbergs bought the property, part of a subdivision, from the developer, who initially planned to keep the farm for himself. The developer seemed impressive -- he wore fancy suits and drove a Cadillac -- but he was deeply in debt and needed to make a deal, Mr. Weinberg says. But Mr. Weinberg didn't know any of that -- and he didn't dig into the deed records that might have revealed it. (Mortgages usually are attached to deeds.)

After the deal was done, the seller pulled Mr. Weinberg aside. "You paid me too much for the house," he told him. "I was up to here in debt. I needed the money."

"Why didn't you tell me this 10 minutes ago?" Mr. Weinberg recalls asking.

"That's business," the man replied.

In the end, Mr. Weinberg made money on the deal -- he sold the house for $590,000 in 1997, records show. But he knows he could have had the house for less, and he says he resolved never again to be out-researched on a real-estate purchase. He credits that lesson with helping him in later deals, from his current land, which he bought in a complex transaction involving a land swap with the seller, to a house he's considering buying in Tuscany, Italy, for which he has studied up on wild boar, a local nuisance. (They can burrow, he has learned, but they can't jump.)

"My whole thing has been research," he says. "All the answers can be found in city hall."

Incomplete due diligence in a real-estate transaction

Continuing our look at successful entrepreneurs and the mistakes that shaped their careers. This video was part of the Mistake Bank Ning site, and I was reminded of it as we toured the city of Wilkes-Barre, PA, last weekend. My wife was driving, and from time to time she'd point to a building and say, "My dad owned that one."

This story was from the beginning of my father-in-law's real-estate investment career, and to me says a lot about due diligence. I've heard many entrepreneur mistake stories where inadequate due-diligence was at the heart of the issue. On the other hand, diving into a deal without having everything figured out, and then making it work, eventually brought these business owners to another level of success.

So: mistake or bold move? Discuss.


Don McFadden on Due Diligence in a Real Estate Transaction - a Mistake Bank story from John Caddell on Vimeo.