When a $210,000 Second Hand Wallet is a Good Deal

 |  About: First Industrial Realty Trust, Inc. (FR)
by: Eddy Elfenbein

Eddy Elfenbein submits: Congratulations to Warren Buffett who not only turned 76 last week, but he also got married. Here’s a quick Buffett story. In late 1999, a man paid $210,000 for a wallet, in what could have been the worst wallet investment in history. There are, however, a few facts I need to add. First, it was for charity. Second, it was Buffett’s old wallet.

Oh…and did I mention the stock tip? I guess that could help explain the price tag. Inside the wallet, Buffett left a stock tip. The stock he recommended was First Industrial Realty (NYSE:FR).

The wallet buyer graciously made the stock tip public. I don’t have a reference to the exact day, but I think I’m going to go with December 17, 1999. The records show that shares of FR had one their biggest jumps ever on eight times their normal volume. After all, this is a sleepy Real Estate Investment Trust (or REIT).

Now I have to remind you that in late 1999, no one was buying REITs. No one. Tech was king. To add some perspective, Morgan Stanley has a REIT Index (^RMS). In October 1997, the index got over 365. By December 1999, it was down to 265. To reiterate, no one was buying REITs.

REITs aren’t supposed to move a whole lot. They have a special tax advantage, and the trade-off is that they must pay out almost all of their profits as dividends. So while every dot.com was soaring, the high yield stocks weren’t standing still, they were falling. The higher tech went, they lower these stocks fell.

On December 16, 1999, FR closed at $24.39. For the previous 12 months, it had paid four quarterly payments of 60 cents a share. So without even looking at the company, we know it was yielding 9.8%. Plus, the company had just raised its dividend to 62 cents a share, so investors could count on a yield of close to 10.2%.

Not only did FR jump on December 17, but the news of Buffett’s recommendation lifted the entire REIT sector. Who knew that real estate was about to take off?

Last week, First Industrial closed at $43.35 a share, so the stock has climbed over 67% from the price after the Buffett news was made public. If you include the very generous dividends, which are now at 70 cents a share, the investment in FR would have made you over 180%. Over the same period, the S&P 500 is down about 8%, although dividends have given the index a slight gain.

If the wallet buyer started with a portfolio of $350,000 (let’s consider the $210,000 an advisory fee—60% would embarrass even a hedge fund manager), and the remaining $140,000 was all put into First Industrial, he would be ahead today.

So maybe it wasn’t the worst wallet investment in history.