(The comments and ideas in this editorial are distilled from Michael Cobb's annual letter to the shareholders of ECI Development. Also pasted below are a poem by Rudyard Kipling and an excerpt of an article by John Mauldin. Kipling gives some of the best advise any parent can give a child as well as some great concepts for corporate governance. Mauldin gives compelling testimony why, despite the tough times right now, we should remain optimistic about America's future. )
Dear Shareholders,
The New Year is a time to reflect upon the past, but more importantly, it is a time to forecast the year ahead and chart a course for ourselves that allows progress in spite of a wide range of unknowns, uncertainties, areas of challenge, and areas for opportunity. The challenges today range from forces largely beyond our control, like the world economy, attitudes towards real estate ownership at this specific moment, political and economic challenges in North America, political and economic challenges in Latin America, to challenges we have some measure of control over, human resources, fiscal management and operations.
The job of the Chairman and CEO is to look into the future and set a course for the company despite these unknowns. Strong principles always set a strong foundation. My favorite principles are the five P's, people, planning, prudence, patience, perseverance. There is a great poem by Rudyard Kipling pasted below that captures the essence of these in a wonderful way. Suffice it to say, principles are paramount.
People. "It's always about people." Great ideas are simply ink on paper, without an excellent team to execute the plan. The best companies are blessed when they have recruited a talented team of professionals to run the company. Joint venture partners, suppliers, and associates who do far more than carry their weight are vital. Shareholders too are an important part of any corporate team. The tipping point is a critical event, and it's generally the sum of hundreds, thousands, or millions of single voices all singing in harmony that finally allows the mainstream to hear the great idea might make sense for them too.
Planning is both the Boy Scout motto, "Be Prepared," and the quote, "Prepare for the worst and hope for the best." Planning is a roadmap for progress. Nothing substitutes for a well designed and defined plan. Yet we must allow for adaptation and change. The competitive environment is dynamic and what makes sense today, may tomorrow be dysfunctional.
Prudence, as underscored by ECI's 100% equity funding philosophy, may not have appeared wise in the heady days of the real estate market a few years ago. But knowing that there are things you can't know, demands caution even when all others are running full speed ahead. The decision to grow slow, without debt, looks pretty good in hindsight.
Patience is active waiting with a purpose. Thomas Edison said, "Hurry while you wait." Personally, it's reading while I wait in line at airports. For a company, it's doing a hundred things that can advance the cause of a company without a firm time table for success. A focus on finding the right clients and partners pays off with huge dividends, but it rarely happens overnight. Rather it is with patience that one harvests from the multitudes those which will serve the company best and those that the company can serve best.
Perseverance is continuing to do the hundred things required by active patience even though the results may not be immediately evident. ECI has proven its mettle through the tough times, delivering homes, condominiums, and a golf course while most in the industry ducked for cover. The results are visible, concrete, and critical. The wary consumer wanting a home overseas is no longer likely to believe grand stories and wide eyed promises.
So what does the year ahead look like? Right up front let me state that I remain optimistic for the future. "Prepare for the worst and hope for the best," means be realistic and remain optimistic.
There are some apparent reasons to be happy about the economy at the end of 2009. The markets are up sharply from their springtime lows. Generally about half of people's losses since 2007 have been made up with these gains. The economy seems to be growing again and housing prices have largely stopped plummeting. However, these optimistic facts may cover over some truths that aren't so positive.
Many of the economists and analysts I read indicate a market about 40% overvalued from a price to earnings standpoint. One of these, John Maudlin, is especially prescient. Included at the end of this article is part of an article he wrote last fall that is especially insightful. He discusses his reasons to remain optimistic in the face of some serious fundamental challenges. You'll also find a link to subscribe to his free e-letter if you find his thoughts compelling.
With the Dow trading at 10,000+, where are the earnings of companies today to support the market's valuations? The average PE is now 22. With an economy projected to grow at 3.62% and official unemployment at nearly 10%, how does this valuation make sense? Once the cash infusion from the Government ends, how does the rally continue?
New home starts continue to be slow, and there remains a large inventory of unsold product, especially in the "bubble" areas of Florida and Southern California. 84 major US builders, and hundreds of smaller ones, have gone out of business since 2008. Unemployment is high and with taxes on businesses likely going higher, hiring will be slow or stalled. The specter of inflation caused by trillions of dollars in helicopter money is most certainly awaiting us around some nearby corner.
In the Caribbean and Latin America, development projects like the Ritz Carlton in the Turks and Caicos have stalled and in many cases left "white elephants" on the beach. In the Guanacaste region of Costa Rica, the leader in retiree and second homes in Central America, the number of building permits in 2009 was only 7% of the number in 2008. In other words, construction starts fell by 93%. Developers throughout the region are facing the same kinds of difficulties as US builders and many are simply closing up shop and going home. These are financial realities that shape our marketplace. We don't work in a vacuum and clients make decisions based on these same realities.
So how does a Latin American real estate development company first of all survive in this market, and secondly, how does it thrive. These are the two fundamental questions we are asking and have been asking for 2 the past two years. The answers produced allow us to prepare and work towards the immediate goal of survival, and the second goal of continuing to build our business.
On the survive side, we are making it. Cutbacks and layoffs while painful are critical. Last year we trimmed 1/3 of our staff and the balance took a 25% pay cut. Additional downsizing in 2010 may be required with further reductions of operational overhead. However, there is a limit to which a company can be cut back and still continue to operate and provide services to existing clients and be actively engaged in the market to attract and serve new clients. We are nearing this point.
Crisis is also a time of great opportunity. Competitors are dropping out of the race quickly and only the strong will see the other side of this market downturn. While difficult for business, there are silver linings in most crisis clouds. The first is that competition narrows. While not a fan of seeing other people hurting, this thinning by market forces is a healthy process. The types of real estate product in the region going by the wayside are the speculative, ghost town products of empty lots on the beach. The sales pitch of, "Buy this lot today and it will triple in value over the next 2 years," doesn't hold water any longer. The speculative buyer who wanted to leverage condos and properties for maximum return has largely left the market for now.
So who's out there buying? This is the fundamental question. Right now, it is the consumer buyer who wishes to be south-of-the-border for quality of life and cost of living reasons. The hard times economically in North America reinforce this need and are driving more folks to consider this alternative.
Ernst and Young made a study in July 2008 where they analyzed the financial reserves of baby boomers. The reality of what they saved and their likely future cash need paints a bleak picture for retirees still thinking inside the box. According to E&Y, 60% of new retirees are going to outlive their assets if they don't cut back spending significantly. They simply have not saved enough. And what about Social security? COLA or no COLA, the government will surely inflate away some of what is owed to seniors. What alternative is there?
With this state of affairs, there is strong reason to believe that ECI Development's client base will grow. It is not just the folks already looking overseas for retirement possibilities, but will include others who hear stories from their pioneer friends who went first and discovered a better quality of life and paradoxically, a lower cost of living. These buyers want services, amenities and neighbors. Fortunately there are companies like ECI who can and do offer these critical items to the person ready to begin spending time in the region.
While not the sexy part of the market, the decision to focus on middle class product also seems wise in hindsight. The nouveau riche buying million dollar or more second home properties seems to have all but dried up at this point. That market was largely fueled by home equity lines in the US. There will continue to be some traction for all levels of product, but recent surveys of developers show a strong trend toward smaller, more affordable homes in the second home and retirement home market.
So where does a real estate development company go from here? Surviving the downturn for as long as it lasts is first and certainly most critical. The bottom of the cycle may be longer and more pronounced that expected or hoped, but by hunkering down and keeping costs low, it will be possible to make it through.
The second important factor is how to thrive in this tough time and take a larger and larger share of the market that exists. There is a market. It might only be 20% of what it once was, but it exists, and it is much more discriminating and specific. These qualification factors work to the advantage of a well prepared company. Prospects and clients are now interested in owning and using a home or condo in Latin America. Promises of things to come don't work for folks wanting to move and live there right now. Only resort communities that have reality, homes, condominiums, golf courses, tennis courts, club houses, restaurants, residents and neighbors will do well in this environment.
ECI Development continues to look well into the future and sees the opportunity to be the Sun City of Latin America. We are actively building an audit regime for the companies and our focus is on producing the financials and business models for a pre-IPO round of funding. These funds will be used to make the acquisitions of property in Panama, Argentina, a tropical highlands piece, and additional property in Belize. These are the strategic acquisitions that will let us serve the retiring Baby Boomers with the widest range of geographic choice in the region.
Shareholders in ECI know that true diversification means more than a basket of US stocks and bonds divided up into the various sectors. True diversification means owning non-dollar denominated assets, foreign stocks, precious metals, currencies, and overseas real estate. They know that they have the power to make decisions and understand that their financial future is in their hands.
As a friend of mine, Dr. Susan Clancy, a Harvard Ph.D. says, "There are two kinds of people. Those who accept the responsibility for their actions and those that assign blame and externalize cause for what happens to them." She's right. By in large, ECI shareholders fall into the category of taking responsibility for their life and its direction. If you are reading this and you are not a shareholder, you may be that kind of person too. If so, be in touch for more information.
While the future is uncertain, we can and do look at the year ahead and make best guesses at how we can navigate wisely into the unseen future. We also understand that a plan is a map, and there are likely detours and we'll have to make adjustments along the way. But a plan and direction is far better than letting the winds of fate blow you randomly across the unknown waters.
As a coda to this year's comments, I'd like to reference a new favorite book of mine "Halftime" by Bob Buford. This book talks about a transition point in life that many of us reach. It is a point at which we, at a deeply heartfelt level, want to transcend from a point of success to one of significance. Success is what we've done for ourselves really, a way to measure our achievements in our own minds and perhaps against others as well. Significance is largely a feeling we have when we know we've made a difference in the lives of others. When we reach this point and find a desire to transition from success to significance, it calls for soul searching, because success and significance don't always come in the same package.
But we should feel extremely lucky. ECI gives us the opportunity to find success and significance simultaneously. As E&Y discovered, there are millions of retirees who face a serious financial challenge in retirement. If the markets drop further, the challenge is heightened. The prospect for these retirees of making daily choices of what to cut will be horrible. Do they choose to do without heat, food, or medicine? These are the hard choices that many of the new retirees are going to face. We at ECI offer them a better alternative south-of-the-border. Some will see it and take advantage of what we know they can have, a happiness unattainable in the US on the limited resources they posses.
As we serve them, we will profit and we will distribute those profits to shareholders. This is "success" for the company and those who are part of it. As we serve these people we offer them an enhanced lifestyle for less and solve a critical problem they face. This is "significance" because we have done a wonderful thing for others. The marrying of these two results in one effort is a special opportunity, for it is rare that success and significance come packaged as one.
Take a look below at the poem by Rudyard Kipling and the article by John Mauldin. They are both exceptional and offer additional insights and clarity. Then enjoy a fantastic year knowing that your company is in good hands and is navigating the difficult challenges with the strong principles of people, planning, prudence, patience and perseverance.
Michael Cobb
Chairman and CEO
www.ecidevelopment.com
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If
Rudyard Kipling
If you can keep your head when all about you
Are losing theirs and blaming it on you;
If you can trust yourself when all men doubt you
But make allowance for their doubting too;
If you can wait and not be tired by waiting,
Or being lied about, don't deal in lies,
Or being hated, don't give way to hating,
And yet don't look too good, nor talk too wise;
If you can dream - and not make dreams your master;
If you can think - and not make thoughts your aim;
If you can meet with Triumph and Disaster
And treat those two imposters just the same;
If you can bear to hear the truth you've spoken
Twisted by knaves to make a trap for fools
Or watch the things you gave your life to, broken
And stoop and build 'em up with worn-out tools;
If you can make one heap of all your winnings
And risk it all on one turn of pitch-and-toss,
And lose, and start again at your beginnings
And never breathe a word about your loss;
If you can force your heart and nerve and sinew
To serve your turn long after they are gone
And so hold on when there is nothing in you
Except the Will which says to them: "Hold on!";
If you can talk with crowds and keep your virtue
Or walk with kings - nor lose the common touch;
If neither foes nor loving friends can hurt you;
If all men count with you, but none too much;
If you can fill the unforgiving minute
With sixty seconds' worth of distance run,
Yours is the Earth and everything that's in it,
And - which is more - you'll be a Man, my son!
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Why I Am Optimistic About the Future
John Mauldin
I am optimistic by nature. An entrepreneur friend of mine gave me a term that I have grown to love. She calls it "psychic income." It's that bit of hoped-for future income that is in our minds, that drives some of us, inflicted with the entrepreneurial gene, to do the next deal, make the next big plan, scheme yet another scheme to finally hit whatever counts as the big one for each of us. How much better would our life be, how our problems would go away, if only this one thing would come about! It has not yet become real income, yet we live and act as if it is almost real. We can feel it getting ready to happen. It is still in our heads, this psychic income. Yet it is in some ways real for us.
I get my propensity for psychic income naturally. My Less-Than-Sainted Dad lived on psychic income. He was always trying to invent something or launch a new business. He had large ups and downs, and at times we would be now classified as below the poverty line. Not that I knew that as a kid. Mostly, Dad lived in his dreams, though often alcoholic ones, of a better future, but he never gave up. In his mid-70s he was re-inventing the small printing press in his garage, with plans for national production. It was only after we had to take his car from him in his mid-80s that he quit. It was a very sad day. I now know we had not just taken his car, but far more than that: his dreams, his psychic income.
For some, I should note, psychic income is not just about money. It may be about the next promotion or the next big discovery. For some of us, it is just having our ideas accepted and validated in the court of human opinion. It is simply what drives us.
I graduated from seminary in the winter of 1974, entering the workforce in the hard year of 1975. We were coming off a recession, about which I technically knew little. I did know jobs were tight. I was unknowingly faceing another eight years of high unemployment, a tumultuous stock market, rising commodity prices, high inflation, and rising interest rates. Japan was just beginning to be a real force in the world. People were still buying bomb shelters, as Russia was a feared and powerful enemy. As the price of gold rose, there were those who told us the dollar would soon be worthless (the Fed was a problem and the deficit was out of control), and so we needed to buy yet more gold and also a year's worth of dried food.
Not the best time to start a business; yet within a year or so, I ended up starting my own print brokering business, as jobs were scarce and that is what I knew. I often get letters from readers giving me grief about my rich hedge-fund friends and our fabulous wealth, and how little we relate to the real world. And for some of my rich hedge-fund friends, that may be true (although for most of my friends that is not true). And I am sadly far from rich, although I have dreams.
I remember waking up in the late 70s at 2 AM with a knot in my stomach, because a small bank was in trouble and had called my loan (an amount which now seems so small, but at the time it was all the money in the world). How would I make payroll? Gas and food? I know what it is like to work long hours and live on a very tight budget, with some months being behind on everything, while all the while your family is growing.
But I got lucky, and through a series of events got into the investment publishing field in the early '80s, then partnered in an investment firm, and then went on my own in 1999. I stuck this letter on the internet in August of 2000, and things just took off.
But how many setbacks, bumpy rides, and false starts have I gone through over the decades? Frankly, I try to forget. But the point is that each of those episodes was another learning opportunity. And I woke up the next morning and started trying to figure it all out.
But it's not just me, it' is tens of millions of entrepreneurs and businessmen and women in the US, and hundreds of millions worldwide, that have the same ambitions and drive. Every night we go to sleep on our psychic income, and every day we get up and try to figure out how to turn it into real income. And some of us are talented or lucky (that would be me) enough to make it happen.
Long-time readers know that I think we are in the midst of a secular bear cycle, much like 1966-82. The next decade is likely to produce less than average growth, due to structural problems and the bad choices we have made with personal and government debt. I am perfectly cognizant that unemployment will be over 10% for a protracted time. That is tragic for those unemployed and underemployed. I realize the entire developed world has huge and seemingly insurmountable pension and medical obligations over the next few decades, which we cannot possibly hope to meet. The level of angst that we will live through as we adjust will not be fun.
But the point is, that is just what we do - we live through it. In spite of the problems, we get up every day and figure out how to make it. Would it be better if we could get our act together in (pick a country) and not be forced to adjust because we have come to the end of the line? Yes, I know we will likely have some very tumultuous times ahead of us, making business and investment decisions more than a little difficult.
So what? The future is never easy for all but a few of us, at least not for long. But we figure it out. And that is why in 20 years we will be better off than we are today. Each of us, all over the world, by working out our own visions of psychic income, will make the real world a better place.
John Mauldin, Best-Selling author and recognized financial expert, is also editor of the free Thoughts From the Frontline that goes to over 1 million readers each week. For more information on John or his FREE weekly economic letter go to: http://www.frontlinethoughts.com/learnmore
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