Mark Elliott was at a beach party in San Diego right before the housing bubble burst in 2008. He had seen the signs of collapse… he knew it was imminent. It wasn’t the last time he’s shouted into the wind.
But this med student turned investment advisor, who founded Elliott Asset Management, took advantage of that downturn and others to benefit himself – and those clients who would listen. He explains the painstaking research and analysis that has allowed him to spot trouble – and opportunity – well before it hits the mainstream.
We also talk about how it’s guiding his investment plays now, as well
- Why you can only trust independent research – and where to get it
- What to do now so you have the advantage in a liquidity crunch
- Where to invest in oil today (it’s not oil companies)
- Strategies for spotting undervalued investments in bad economic times
- And more
Mentioned in This Episode: www.elliottam.com
Jay Sparks: Hi, this is Jay Sparks, your host of Finding Unique Value. Today, I’m honored to be here with Mark Elliott, founder of Elliott Asset Management, a boutique investment firm in Boston, Massachusetts, where I also happen to be the principal. Mark is one of those very special people that can find these opportunities, and he’s here to tell us about it.
Mark founded Elliott Asset Management in 2006 as a radical departure from a traditional large financial services firm. Elliott Asset Management is intensely focused on research and out-of-the-box thinking, always looking for opportunities that the crowd has overlooked. He does not rely on outside sources for his research, and typically looks for answers to questions that others are not asking, but should be. For example, when people are trying to profit from rising oil prices by trying to pick the companies that will, quote/unquote, win, Mark is investing in the raw materials needed to mine the oil, which benefits regardless of which company wins.
His research and ideas have gotten the attention of large investment firms, and he has consulted directly with the Chinese government on economic policy. Mark has made a lot of incredible calls over the years, but I wanted to spend today on one of his first calls that was ever published, to better understand his process that’s produced some incredible successes.
Mark, welcome to the podcast.
Mark Elliott: It’s great to be here, Jay.
Jay Sparks: Good, good. Well, why don’t we dig right in and start on that very first call right after you formed Elliott Asset Management in 2006. If you could just take us back to what you were thinking, and what idea was at the forefront of your mind at the time.
Mark Elliott: Sure. Well, in 2006 I had been working at starting Elliott Asset Management for several years already, and so I had already … I have always been following the various different markets and inquiring about different opportunities. In 2006, I had already formed a thesis that there was a bubble that everyone now knows about, but back then it seemed I was one of the only ones speaking about it, a bubble in the housing market, and in the housing debt market. It was simply that housing was too hyped, and the economic value of housing … the value economically wasn’t up to the actual price value. For instance, where I was in San Diego, the average house mortgage was approximately 70% of the average family income. It was just impossible to maintain.
Jay Sparks: Obviously, that’s not sustainable, and that’s going to change. What caused you to start to take action on that idea?
Mark Elliott: Well, really, it’s part of the reason why I started Elliott Asset Management is I just wanted to … I wanted to employ a lot of the reasoning that I had used already to help others. Back at that time, I wasn’t very well-connected to some of the movers and shakers in the industry. The way that I ended up taking action was actually harming my own business. I had already made a number of calls that got a lot of attention of the people around me, most notably in medical school, and I had a lot of people interested in investing with me. When I registered in 2006, I just saw this as being the opportunity … you know, the biggest risk since the Great Recession in the U.S., and that it could be quite catastrophic to all asset classes.
Therefore, as I begun, I actually discouraged clients from investing substantial sums with me, and those that did, I put them in very conservative hedged investments. It was very hard to grow when you’re telling people that they’re spending too much money, that the world’s about to … the sky is about to fall, and you’re not going to get that great return.
Jay Sparks: Well, let me stop you right there, because you just hit like three or four things. I got to slow down just for a second here. The very … I’m going to skip back just to a couple of points you made. You actually acted on something, as you said, that harmed your own business. A, why would you do that, and B, how were you able to do that, right? Most people, particular starting a business, you’re not awash in cash, right, so actually you’re doing things that are going to make it more difficult for you to make money for yourself by … you know, for your firm at the time. What was the thinking there?
Mark Elliott: I’ve always believed in doing what is right, and in order to do what’s right, you have to have yourself in the right position to do so. So, even though when I left medical school I had a substantial amount of medical school debt, I worked very hard, saved, didn’t overspend, lived very frugally, and also did very well with my investments, first with the stocks and getting out before the crash … I had warned everybody about that as well … and then finding every possible manner to buy investment real estate back in 2000 before the huge boom. So, I had enough income in order to be able to live modestly while starting by business.
I had done very well with my investments right before Elliott Asset Management, and had a lot of people that were looking to chase those returns. I just didn’t see a pathway to get there. So, the only thing in my mind was to warn people, and to tell them that when the almost inevitable crash would happen, likely that would be a huge opportunity to invest, and to please give me the money to invest at that time that they would have the cash.
Jay Sparks: When you’re saying they wanted to chase the returns, what are you referring to? They wanted to put money in real estate at that point?
Mark Elliott: Yes, both. Well people wanted to invest in real estate. I was offered to endorse several large real estate deals that would’ve made me a lot of money. I refused. Also, while in medical school, I ran several funds for friends and family that had performed exceptionally well. My friends from medical school had discussed this, shared the results with their new colleagues that … you know, now that they’re doctors, and people looked at the return and made the reasoning that they could continue to spend like crazy, and keep their credit card debt and their other loans if I made them those solid double-digit returns per year. To which I replied, “You know, with the markets the way they are, investing aggressively we could lose … you know, lose solid double digits.”
You know, the numbers just didn’t work. There weren’t those opportunities out there. All asset classes in my mind … just about all asset classes were overvalued. There wasn’t a lot of opportunity to invest.
Jay Sparks: What year was that, roughly?
Mark Elliott: That was 2006 … 2006, 2007. It wasn’t until late 2008 that I started to dip my toe in the water, in early 2009 really went aggressively into the markets.
Jay Sparks: Got it. Back when … You said something else that piqued my interest, because you also said you were offered to endorse some real estate deals what would’ve made you money, and you were living very frugally, so that would’ve been a great opportunity for you to kind of move ahead a little bit personally. Why did you refuse to endorse the deals? What were the terms that you didn’t think would benefit the people?
Mark Elliott: Actually, the terms were very favorable to me. There were several deals. The two … There’s several. Gosh, there was a 250-unit condominium complex that I would’ve had to have brought some of my investors into it. I would’ve got paid very well. I said no to that.
There were several … It was very popular to do what’s called a tenants in common at that time, where people had very highly appreciated real estate, they didn’t want to pay taxes, so they would sell that real estate and move it into a larger development, an office building, a hotel, or something like that. These TICs were almost always run by people with not-so-scrupulous ethics, at very high fees, and were highly leveraged. I just saw them as vehicles that were going to blow up, and they did. Those that invested in those, and there was millions and billions of dollars sloshing around-
Jay Sparks: Got it.
Mark Elliott: … you know, people being … Yeah, they had these presentations in Rancho Santa Fe where … you know, with free dinner, and people would come, and sign up for these things, and it was the best thing since sliced bread, and they completely fell apart.
Jay Sparks: So, you would’ve gotten like a finder’s fee, if you will, right? So, that’s how you would’ve-
Mark Elliott: Yes.
Jay Sparks: … made your money, but the people you put in them, they … you were not sure that this was a good opportunity for them.
Mark Elliott: I was sure it was a bad opportunity for them.
Jay Sparks: Got it, got it. Okay.
Mark Elliott: Yeah, there was one other thing. There was a life insurance company that recruited me. I met with their recruiter, and ended up speaking to the president. It’s a very well-known organization. I won’t mention the name, but very, very large organization. They were excited because I had my real estate license, securities licenses, and insurance licenses. They wanted me to get people into option ARM mortgages, which I would make a large commission off of that. They’re now known as the … I can’t remember … they’re the worst of the subprime loans, and people with prime credit were even taking them out, negative amortization, and then putting that money from the refinance of their house into a variable annuity, which also I’d get a commission from.
Jay Sparks: Yeah.
Mark Elliott: You know, it was another thing that I saw as they would lose their house.
Jay Sparks: Yeah, so another opportunity where the people in the middle are making money, but the actual investors are not-
Mark Elliott: Exactly.
Jay Sparks: … and they’re not aware. Yeah.
You saw that the real estate market was overheated. Everybody of course is feeling very smart about their real estate investments, and if you’re really smart, you were taking loans out on what you owed … what you owned, and then buying more real estate, right? So, you were definitely going against the grain back then. What was the reaction to your clients? Were you getting new clients at this point, in 2007, 2008-
Mark Elliott: No-
Jay Sparks: … or were you working with your existing? Okay.
Mark Elliott: The reaction was overwhelmingly negative. I remember one time walking with my friend, now a doctor, from medical school, on the beach. We ran into a group of his friends, and it ended up being a group of about 25 people. I literally stood in the middle of them and told them why real estate was going to collapse, and the economy was in a dangerous situation. At that point, everybody thought it was a Goldilocked economy, everything was wonderful, and-
Jay Sparks: Sure.
Mark Elliott: … I didn’t have one person agree with me. I spoke about it, quite regularly spoke out. People just told me I didn’t understand, that San Diego, everybody wants to live there, and the weather’s perfect, and that I didn’t know what I was talking about.
Jay Sparks: Yeah. What did you learn from that particular experience? It must have been maddening to know in your bones that you were right, and that … Of course, you couldn’t have predicted the extent that things would’ve moved after that, but taking a very logical approach to that, what did you learn with how you needed to communicate, or who you need to work with, going forward?
Mark Elliott: I realized that I needed to develop long-term relationships with people that knew me very well, like my best friend from medical school. I had already been through it in medical school with the tech market, you know, the hype of 1999. I was there in medical school giving my talks about why tech stocks were overvalued and real estate was undervalued. At that time, everybody thought real estate was too much work, and why would you do that. That’s when I bought my house in Boston that after it burned down it still sold for a million dollars.
Jay Sparks: Yeah. Yeah, yeah. No, that’s incredible. Again, that is something that is very common just based on our biology, right? We’re always looking for the things that are going to get us in trouble, and ignoring everything else.
Yeah. Well, that’s incredible. Again, a pattern that’s soon to be repeated, you are saving when other people are spending. You’re getting ready to spend when other people aren’t even saving, they’re still spending in a different area. How did you get the capital you needed to make the investments that you wanted to? Did you use your own money? Were you using your clients’ money? Did you find other sources to start-
Mark Elliott: No.
Jay Sparks: … when you thought it was too ridiculous to stay out, and you really wanted to start buying. It sounds like it was probably 2008. Was that when you started buying-
Mark Elliott: Yeah, I wish that I came from a background where I had great amounts of resources available to me. Similar to Warren Buffett, he had started his fund, and he had a decent amount of money to start. I had nothing, actually below nothing. Leaving medical school, I had hundreds of thousands of debt. Was very, very, very difficult situation, but I did have fantastic credit, and had the property in Boston.
It was late 2008, and I could … You know, the markets were starting to get jittery, and I could see where credit could soon dry up. I actually had a bead on that. I was talking to the mortgage brokers, and a bunch of companies were getting out of the business, and I knew that this would just dry up liquidity left and right.
I got a teaser offer from my credit card, and because I went to med school and all this, I had a limit of like 40,000 on that card, and they offered me something like 1.99 or 2.9% for life. So, I took that cash advance, saying money’s going to be very hard to come by, this could be some of the best investment opportunities in my life, maybe the best coming up, and if I don’t take advantage of them, then I’m probably get kick myself so hard, and if I lose 40,000 at 2% or whatever it was that I could pay off over time, I’d rather take that risk, because just the risk/reward I thought was going to be phenomenal, and it was.
Note, I don’t suggest the kids back home to do that.
Jay Sparks: No, sure, sure. Yeah, I know, because this is interesting to be hearing this, because typically this is not a good reason to run up your credit card, right? Could you take me through some of the … I guess the way you’re looking at it is probabilities, right? What’s the probability that I spend this 40,000 and it will go to zero quickly, and what’s the probability this 40,000 will go to 100,000 or more? How … did you look at that in that specific way, or were there other ways you were looking at the risk/reward relationship?
Mark Elliott: I’m always calculating risk/rewards on just about everything that I do. With the capital that I took from the credit card, the decision amounted more to an opportunity cost. I could foresee, and was correct, that the credit markets could dry up in that liquidity. When credit markets dry up, liquidity becomes very, very valuable. So, for me to spend 2%, $800 a year, to have $40,000 in liquidity that I would be able to allocate to potentially very high rate of return investments, to me, it was worth that cost at that time. A very low loan fee, so to speak, particular on an unsecured line of credit.
In late two thousand … Was it? Late 2008 … there was already some preferred securities that I was monitoring, and I had been monitoring these companies for years. There was one in particular. It was Entertainment Properties. They’re one of the largest landlords for megaplex movie theaters. They have the top megaplex theaters in their markets, they were actually hitting record revenue sales profitability, 3D movies were about to come out, but they were … all of the sudden that real estate became a four-letter word, basically. Everybody was selling, and their stock price plummeted. Their common stock price plummeted to a fraction of what the value of their assets were.
I looked at their convertible preferred shares. The number one holding that I bought at that time … and I allocated my money without using leverage at first of that 40,000 into them … They had … I had run all kinds of risk analysis, and had found that if they wrote off all their other investments, Entertainment Properties, and if they had about a 60% decrease in revenue on their megaplex theaters that were having record revenues, and they tend to do so during recessions, that they would still be able to pay the preferred shares, and at par, at $25 per share.
In late 2019 I think I paid an average of about 15 to $16, and they had a dividend of 9.25% on the $25, and they were convertible into common stock. So, the dividend that I was receiving annually on those preferred shares that I saw as quite safe, was somewhere around 15 to 16%, without counting the presumed accretion back to par. That was late 2008.
Jay Sparks: Great. So, using your $40,000 loan, you’re paying 2%. On this investment, you’re making 9%, not including any price appreciation.
Mark Elliott: Making more like 15, 16%.
Jay Sparks: How is that? I missed that.
Mark Elliott: The dividend was 15 to 16%. It was 9.25% on $25, and I paid 15 to 16 approximately. Somewhere around there.
Jay Sparks: Okay. So, that’s was … Yeah, so that’s incredible. Was that just a portion of this money, or was that a … was that everything?
Mark Elliott: That was most of the money. I put it in a few other preferred shares, but I knew that company very, very well. I had been following it for years, and I ran the numbers. It was very easy to understand. To me, it was surprising that Wall Street could neglect … could be throwing out this stock at the prices that it was. I did the more conservative option. I wanted to buy the common shares, but I bought the preferred shares because I needed to be more … less risky with the money.
Jay Sparks: Interesting. You’ve said this a couple of times now, you know, the credit markets were drying up. What specifically were you looking at at that time, and do you think that there’s any correlation to what you’re seeing right now?
Mark Elliott: Right now, the different … it’s very, very different. The credit is quite available. The economy has been doing well. There’s a lot of confidence, both in consumers and in executives. But back in late 2008, there had been I believe already just recently Bear Stearns … Well, it’s Bear Stearns, or … No, no. It was-
Jay Sparks: Yep. Yep, it was Bear Stearns.
Mark Elliott: Yeah, it was Bear Stearns? Yeah, Bear Stearns went under. That created a huge liquidity crunch, fear of counterparty credit risks.
Also, of course, real estate was declining in value, and there were many properties that were underwater, and people were losing their jobs, and people were getting their credit lines cut on their credit cards, they were getting their home equity lines cut, they didn’t have the money to … you know, they weren’t able to continue to juggle their mortgages, they were losing their homes.
Housing is, as I’m sure you’re aware, very essential part in the economy. If housing dries up, then people don’t buy furniture, they don’t buy services, they don’t hire people to fix things, they don’t buy new cars, and lots of people end up without work. So, it was really a vicious cycle that created a liquidity crunch that also created immense opportunities for those that had cash to invest.
Jay Sparks: Sure, sure. How did …. because now I’m not sure how these is connected then. How do you see the opportunity then in Entertainment Properties, because it seems like might stay down for a while, right? If people don’t have the money, don’t have the credit, why would they be using those services?
Mark Elliott: Well, Entertainment Properties, the value of their real estate itself is one thing, the value of their business is another. I looked at it in both components. The real estate would have value over time, the economy would improve again, and things would get better, as it did. But the value of Entertainment Properties and the movie theaters were in that it was a resist … that it’s actually a recession hedge.
One of the few bright spots, for instance, during the Great Depression were movie theaters. It was a relatively new event at the time, but for a nickel back then you could go and spend an afternoon in air conditioning, and get away from your troubles, you know, be in a fantasy.
That’s the same case that happened with other recessions since then. People will stop going to Disneyland, they’ll stop going on their cruises, and they’ll stop going to the theater-theater, and instead they’ll go the movies more, because the movies are 8 bucks, 12 bucks, and you know, you’re good.
Jay Sparks: Sure, sure. So, you realize people would not have the money to spend, but there’re still some areas that they would spend it, and focus on the companies there, and you found one that was actually very cheap, relative to where you could purchase it. Is that correct?
Mark Elliott: Absolutely, and I had already done the stress testing. They were making record revenue and record profits, but irrespective of that, I did the stress testing, and as I said, if they wrote off most of … completely, down to zero, most of their other investments outside of their core movie theater holdings, and I said if they have 50% vacancy in the shops around their movie theaters, and if they only get 65% or so of their revenues that they have now for movie theaters, after all of those stress case scenarios, that they would still be able to make the payments on the preferreds. That’s pretty darn extreme. That’s a huge cushion of margin of safety. So, to me, I saw it … it’s a relatively … at the price that I was buying at, it was quite a safe investment. What people consider it safe or not you can argue, but-
Jay Sparks: Sure, sure. No, but I could see if someone who didn’t do the research, right, they would be kind of putting that in the category of all these other services that were probably going to be less likely to earn money based on the credit situation. Did you get a better response with this particular idea than you did when you were talking about real estate, you know, a year or two prior, or was it still the same thing, like, nobody else is doing this, or this is different, I don’t-
Mark Elliott: Well, yeah. I had gone from warning everybody about it, to I sent out a newsletter where I told people that I was starting to see some good values, and I called some of my clients and I said, “Hey, now is the time to give me those millions of dollars that you were offering me several years ago.”
Jay Sparks: Yeah.
Mark Elliott: I only had one client respond, and he opened an account with Interactive Brokers, which I needed to have it at Interactive Brokers because of their low cost of leverage, which I anticipated we might actually use, which I had never used before, and very rarely do. But he put $5,000, and this is a multimillionaire that makes millions of dollars per year. We said he would get 200,000 to me by December of 2008. I told him I wanted to buy these preferred shares and also Fannie Mae and Freddie Mac 5-Year notes that were yielding something like 7 plus percent, and also some GE Capital Markets long-term notes that were at over 8%.
I said the Fed’s going to cut rates down to virtually zero, and they’re going to stay there for many, many, many years, so put that 200,000 in and allow me to leverage it some, and I’ll make you millions off from just that 200,000, or better yet, give me a couple million. But he actually only ended up putting 5,000 in, until the market hit a peak like over a year later.
Jay Sparks: Well, that’s why, right, the average investor makes, you know, 2 or 3% in the mutual funds, but the average mutual fund is making 8 to 9%, right, for that very reason. You know, when things are going up-
Mark Elliott: Yes.
Jay Sparks: … you feel good, so you add money, and then when things are going down, you feel awful, and there’s bad news, so you tend to either withhold investment, or you, worse, to take it out the loss. You do the exact opposite.
Mark Elliott: Yes, yep. It is human nature, and it goes against our ability to be successful in investing.
Jay Sparks: Yeah. So, how are you able to consistently get around that? Already, you have two really incredible examples here of you going against the tide, and that rewarding you and anyone who was smart enough to listen to you, handsomely. Why is it that you’re different, Mark, than the rest of us in these situations, because-
Mark Elliott: I don’t know. I don’t know.
Jay Sparks: … anyone looking back at this I think is absolutely going to agree with everyone you said. Everything you said is completely fact-based, and you even understand kind of the psychology, the investor psychology and the human psychology behind decisions, and you’re taking that into account too, yet it seems like it’s very rare that someone would listen, right?
Mark Elliott: I think it comes from a combination of factors. One, I’ve been interested in the investment market since I was a very young child. I was a bit precocious, and was reading my father’s investment newsletter since around the time of around five or six years old, and I bought my first stock-
Jay Sparks: Oh, you’re were one of those kids.
Mark Elliott: … when I was very young. Yeah, yes, I was.
I continued to follow it throughout my life, right through med school. I enjoyed reading The Economist more than I did reading my medical texts. But I think also med school helped me in the ability that I’m practically have my MD from a top school, and I studied psychology, psychiatry, and human behavior. But I think it’s mostly from having a lifetime experience, having followed the markets. And maybe my parents dropped me on my head or, I don’t know, I’m wired a bit differently than most.
Jay Sparks: Yeah. Well, you’re definitely wired different, right, because it’s not … or all of us would be making these decisions right alongside you, and there would be no opportunity, right?
Mark Elliott: Exactly, yep.
Jay Sparks: So, maybe that’s a good thing for people that are … will listen to you. I wished I’d met you back then, right? I’d be in a very different situation today, but knowing you now, and I get to work with you, so it’s even better. I get to see it up close and personal, so-
Mark Elliott: Well, what’s different, Jay, is that most people say that … I’ve been told this throughout … It’s been now decades that I’ve been investing, and calling things, and only in the last decade or so that I’ve had the money to really make a lot for myself, but people have said consistently through time, they’re like, “Wow, you do a great job of this, and you’ve done a great job. I wish I knew you a few years ago.” But then when the next thing happens, they don’t act, or they don’t do anything to act. So, that’s … People need to act.
Jay Sparks: Yeah. Well, here you are a few years ago, right? Because if they don’t do anything, they’re going to be right where they are now, so-
Mark Elliott: Mm-hmm (affirmative).
Jay Sparks: … it’s good to see you have more people that are … they’re listening and actively interested in what you’re doing.
Let me get back to the … You had the Entertainment Properties, and then you also found some real estate, right, that was incredibly undervalued. Can you talk a little bit about that?
Mark Elliott: Yeah. Well, first … Yeah, continuing the Entertainment Properties story, the markets in general and Entertainment Properties preferred continued to decrease right and through to the bottom of the market, which was about 10 years ago today, March 9, 2009. What I bought, I believe, initially at maybe 16 and change, I believe the low trade was $9 or a little bit less. I kept buying it all the way down, and employing leverage eventually, which I generally don’t do, but it was the time to go all in.
Jay Sparks: Why in this time, because I know you don’t like to … like any good business person, you don’t borrow money unless you really have to, or there’s a real good reason, because there is some times when that is a really good thing, right? Why was this particular case good compared to the other situations you had seen that you didn’t use leverage?
Mark Elliott: The risk to reward again. As the price decreased, and the fundamentals of the business stayed strong, doing … you know, simplify it, the returns that I could get would’ve … were absolutely astronomical. When I bought some of the lowest price bonds … Excuse me, not bonds, preferred shares … they were paying me a current dividend of around 25% at the low, maybe a little bit higher than that. So, if I had leveraged those three to one, I was making on that $40,000 investment $30,000 a year, you know.
Jay Sparks: Yeah.
Mark Elliott: That’s somebody’s income, and I have … only risk is the 40,000. If it goes down more, I get margined out. Yeah. So, it was an opportunity for me to set myself up for retirement with only 40,000 and with, you know, very measured risk.
Jay Sparks: Yeah.
Mark Elliott: Yes, the risk gets higher when you leverage up like that, but again, these were preferred shares, and I believe that if they had been rated by a ratings agency they would be triple-B-minus, and I believe the rating agency later did rate them that double-B-plus or triple-B-minus, so, yeah.
Jay Sparks: Yeah. No, that’s incredible. So, you were … Again, the other thing too you said which is not typical of the average investor, in that you were buying all the way down. Now, if you like it at $10 and then it’s only at 9, you’re going to like it even more, right, which you’d expect. Was there a certain … Would there have been a certain line where you would’ve been nervous that maybe you’d missed something, or was this something that you had already decided before you even started, or would invest anymore, you already were very confident?
Mark Elliott: I had already decided and was confident in my numbers. However, when the price started to approach about half what I thought was a good deal in late 2008, it was certainly nerve-wracking. The leverage was getting to the point where I could’ve started … you know, is not too far from starting to have some margin calls on March 9. But on March 9, I had a gut check. It was very, very, very difficult, but that’s when I wrote the newsletter where I said I thought it was the … you know, that the extreme pessimism that we saw could spell extreme opportunity, and that’s when I encouraged and called every one of my clients, and I’d actually gone and met every one of them in earlier March and late February, and said, “Now is the time to go all in.”
You have to have that conviction. You’ve done your research, you see the numbers, and you’ve got to move through. For me, it’s strange … it’s actually more strange that people wouldn’t act at times like that, and they will at the top of bubbles when the numbers make absolutely no sense. I think that’s a better question to ask. You know, why are people investing when real estate in China, for instance, right now … real estate, you buy a million-dollar apartment, and you might get 2% cap rate. Why are you buying that, you know?
Jay Sparks: Yeah, yeah.
Mark Elliott: That’s what people did in real estate in America back in 2006, ‘7.
Jay Sparks: Sure, sure. Okay, yeah.
Mark Elliott: But nobody would buy it when I was there in Vegas buying it when without using leverage, I could get a 25% rate of return on the houses that I bought. That was insanity to me.
Jay Sparks: When did you start to see that in Las Vegas, and what prompted you … Were you there just vacationing, or were you living there, or how’d that-
Mark Elliott: No, no. I was scraping by, and had all my money in the stock market, but I was doing research on the real estate market, and following the trends of foreclosures and foreclosure process, and could see that it was really coming to a crescendo. So, I specifically looked for markets that had been hot in the past, that would be decent markets in the future, and that would likely be, frankly, suffering the most from the downdraft.
Las Vegas stood out for me, one, because it had been one of the fastest growing metropolitan areas in the United States for like the last three decades, and the mentality I just assumed of a lot of the people there were risk takers, and that there were a lot of second homes, and a lot of new building, and also the economy could be quite cyclical in an extreme downturn, with the gambling. But, there was huge amounts of infrastructure there that would be utilized, even if in an offhand chance that the gambling halls went out of business, those billions of dollars of infrastructure would find other uses. So, there would be a need for at least worker housing close to the workplace.
I did research online and could see there were certain communities in Las Vegas where the houses had been selling for almost $400,000, just a few years back, that they were selling at auction for sometimes under 20,000 for the exact same house. I was not buying at auction initially. I went to the auction when nobody was there. There was only two other people in the room. I was trying to learn it. There was nobody to teach you. I ended up buying on the open market initially, and I was buying … I ended up buying houses for 40, $50,000 … Yeah.
40, $50,000, and renting them out for $1,200 a month.
Jay Sparks: Wow. If I can just step back just a little bit. Was Las Vegas the most extreme example you saw in the country, or was it the most extreme example-
Mark Elliott: It was-
Jay Sparks: … that was close to you, because I know you were in the Southern California at that point, right?
Mark Elliott: Yeah. Southern California wasn’t as bad as Vegas. There were some areas that were very attractive, but Vegas was where I could afford to buy houses with cash, and there are so many houses and so few people chasing them. I also was interested in Florida. I went to central Florida, and there were phenomenal deals there, and I loved the demographics of Florida, and the long-term outlook for Florida.
I went to the Gulf Coast. Oh, my gosh, Port Charlotte was crazy. But my base was in Southern California, was in San Diego. I wasn’t a multimillionaire at the time, not even close, and I didn’t have a lot of money behind me, so I needed to be in an area where I could afford. In Las Vegas at the time, hotels, they were virtually giving them away while I was looking for the properties. I bought my first home quite quickly, and I used my other credit card for my first home.
Jay Sparks: Yeah.
Mark Elliott: Yeah.
Jay Sparks: Yeah, even when you were traveling there, you were able to get discounts. So, you were even watching your expenses then-
Mark Elliott: Oh, yes. Yes.
Jay Sparks: … even though you were going there to … Yeah, okay. So, again-
Mark Elliott: Oh, no, I stayed in the least expensive … Yes. I did get comped at some of the casinos though, because they were comping everybody that played.
Jay Sparks: You found these incredible values. You had some cash. You didn’t have a ton, but you didn’t spend on things you didn’t need to spend on. You lived very frugally. You found the best deals, and you put as much money as you could. This is one of the rare cases where you were actually using either credit or some sort of loan. Did you also … At this point, were you able to get more money from people that you were serving from an investment standpoint, or other people, or is this still too early for them to want to join you in this?
Mark Elliott: Still too early. It was a little over a year of me asking them and encouraging them before I got others to start investing.
Jay Sparks: Okay. Now, did you … do you get paid for that, or is that something that is done as a … you know, you were just helping-
Mark Elliott: Nope, that was something that was done just to help. It was the best investment out there. I encouraged people to take money from my accounts to buy real estate at that time, because I thought it was the best risk to reward tied with a low-interest mortgage. You know, always do the right thing, eventually things come around. It might take a while.
Jay Sparks: Sure, sure. No, that’s incredible. Now, when you did get some more people interested in the real estate, did you help them buy several units or homes, or just one, or how was that structured, like what were you trying to do?
Mark Elliott: No, there were a group of friends. I helped a number of people on one-offs, but I was a central person in the purchase of approximately a hundred homes, and I brought in a bunch of other people, too. So, I ended up being the catalyst to buying many hundreds of homes in Las Vegas area, and elsewhere, but I myself ended up at my peak with interest in … I believe it was 27 units.
Jay Sparks: Okay. You were never able to put together some sort of fund or real estate trust.
Mark Elliott: Oh, yes. I actually made efforts to create the first single-family and distressed note fund in the U.S., and I had become well-known in China, and actually had quite a few interests … or, quite a bit of interest in very large investments from China. I met with some folks in Silicon Valley, had some indication of interest there, and I actually had met … I had met with The Trump Organization, and had an agreement to represent them in their distressed properties in Vegas.
Jay Sparks: How did you get introduced to The Trump Organization? You’re an individual who is doing things on a shoestring. You’re finally after a year able to get some other people to start to follow your advice. You’re helping them organize it, but most cases indirectly, it’s just kind of these are the things you need to look for, right? Then how does The Trump Organization come into play here?
Mark Elliott: Well, I was one of the earliest aggressive investors in real estate during the downturn, and was quite vocal about it, and was trying to shake some things up to create an investment fund. I had become well-known in China, had been published in several prominent news outlets there, and had a position within a government organization that was quite lofty, prestigious, and very unusual for a Westerner to be in the role that I was in.
So, I utilized those things, as well as I had moved into an apartment in CityCenter at MGM, the ultra-luxury development there, right near the Trump Tower. I had inquired with MGM about bulk purchasing their units, and I showed them who I was working with, showed them my articles and such, and it turned a lot of heads. And also, at that time, you have to consider, there weren’t many people looking to buy real estate, and there was a lot of need for liquidity. Everybody was hurting.
Jay Sparks: Sure.
Mark Elliott: MGM was on the verge of going out of business, so they wanted to talk to anybody that had the remote opportunity to bring them money.
With the Trump Towers, I worked with some brokers that I had bought a bunch of real estate before, and I showed them that I had the ability to purchase a bulk lot of their real estate. I actually met with Trump Jr. at one point, very briefly. But the person who was in charge there … I can’t recall his name, but he was really in charge, not Trump … they didn’t offer me a good enough discount.
Jay Sparks: Yeah.
Mark Elliott: But I told them, I said, “Hey, listen, you’ve got hundreds of units. These would sell very well in China,” and their … you know, with their visa program that later a bunch of investors took advantage of, but I’m one of the first to do that … with the visa program that they had for investors, and Class A real estate, and Vegas, and luxury, and on the cheap, it was a slam dunk to do. That’s how I got in the door.
Jay Sparks: Wow. So, you had the big idea even then, even though it was starting with something relatively small. That’s incredible. Now, take a step back again. You had … and we … this is probably a topic for a different podcast, but you had this relationship with the Chinese government, which is very, very interesting, and how that all came about, but seeing that you had that, what would’ve needed to have transacted in Vegas for you to take advantage of that? Is that like another trip back to China to be able to do that.
Mark Elliott: No, I had an office in China. Yeah, I had an office in China. I was flying back and forth all the time at that point.
No, due to the influence that I had, and the position I was at … It wasn’t the Chinese government that would’ve invested, it was … there was the Bank of China, Wealth Management division in Shanghai, their senior VP had offered to put me in front of his investors, which were several billion in expendable, and other investment managers there. It’s hard to describe in detail, but if you become well-known and connected with a prominent government institution … and at that time President Xi said that that was the most important project in all of China … it really gives you a lot of credibility. Also, the numbers didn’t lie, and over there, people were excited about real estate and America.
You know, I was a different person, and very respected. So, it didn’t take a lot for me to open doors there.
And there was a lot of liquidity sloshing around. So, to tell them, “Sell your place in China that’s making you 2% and that you’re going to lose after 75-year lease, because you don’t own it, and that it could crash, and that you buy in America, and that you could get over 20% without using a loan, and you own it forever, and if there’s political problems in China, you can get on a plane and come to America with this visa …” I’m like, “How much would you pay for an American Green Card? You know, half a million? Well, you get it for free.” You know, so-
Jay Sparks: Yeah.
Mark Elliott: … it was very easy, and a lot of people used that idea later on to raise funds for less profitable projects. But I would’ve been, you know, the first, or one of the first.
Jay Sparks: And then … So, at that point … and that was what, 2013?
Mark Elliott: 2012 I found a tumor that I had to have removed that could’ve been cancerous and life-threatening, so I took a big step back and then early 2013 things were starting to get busy in the real estate market, and move up a lot, but I saw a lot more opportunity still to reignite, get things back in order, and that’s when, you know, the world fell out from under me.
Jay Sparks: Got it. That’s when you got exposed to some chemicals when you were recovering. Is that the-
Mark Elliott: Yeah, yeah, yeah.
Jay Sparks: Okay, okay.
Mark Elliott: And my … the fires, you name it. Yep.
Jay Sparks: Yeah, so you took some time away from the day-to-day investing, but at some point a year or two after that, you actually ended up … your investors ended up exiting most of their properties, I would assume, or do they still own them to this day?
Mark Elliott: No. I was early … What was it? … early 2012 when I wanted to start bulk buying real estate at the … I got approved with Fannie May to bulk buy directly from Fannie Mae.
I talked to the people that I owned the properties with, and I had … There were so many properties out there to buy, and I wasn’t an experienced … You know, I had to learn on the fly. I ended up narrowing down the property choice using some figures that were somewhat arbitrary in that I didn’t have time to learn. I had to learn as I went along. I bought a lot of properties with swimming pools. I thought, “Hey, these are going to be valuable over time, and it’s a differentiating factor.” They were a pain in the butt.
I told the people that I bought with, I said, “Let’s sell all of these properties, and take the money and go to auction,” and they said they wanted to buy over 200 properties. I said, “Now is the time. Things are getting heavy I hear. I just spoke to a Blackstone exec the other day. They’re asking me what I’m doing.” We sold the properties, and then they didn’t fund anything. They thought it would be many, many years before the real estate market came back in Vegas, and I told them otherwise, but I didn’t get a lot of traction, and then … So, I went for seeking the outside investment more, like I told you and-
Jay Sparks: Oh, sure, sure. But even so, in that roughly … Was that four-year period or so, give or take? … you made some … you know, you had positive cash flow from day one, and you had some incredible return because of the levels that you purchased, right-
Mark Elliott: Oh, yes. Yes.
Jay Sparks: You bought at good prices, and then that’s really where you limit your risk the most. You have the least amount of capital exposed, and you have the greatest opportunity for the upside. Again, a very common-sense approach, but it’s not done often, for the reason you said earlier. People are much more confident when they see all the good news, and all their friends and colleagues are doing that.
Mark Elliott: Yeah. I think ultimately with the sales that we made, I ended up keeping seven properties wholly in my name in Las Vegas, and I had another seven units in Boston. To me, that was enough, and-
Jay Sparks: Yeah.
Mark Elliott: … but when I got sick, I couldn’t manage anything. You know, I had expenses, and I couldn’t even breathe, so keeping track of tenants and stuff was hell.
Jay Sparks: Yeah, yeah. No, but still you had … you were able to make a lot of … you know, create a lot of options for yourself because of that, especially starting in the hole, in debt, coming out of graduate school, or medical school, and then turning that into a big positive net worth over a few years, living frugally, and investing wisely, with any money you either had or any access to credit that you had. That’s really an incredible story.
I think you’re being very humble in how much work you did, but … you kind of glossed over a couple of things I think where probably … I got to think, you were working day and night during some periods, right, just analyzing things, because of the volume.
Mark Elliott: Oh, sure. Well, no I … For me, people say that I work a lot, I do, but there’s no clear line. I don’t clock in at 8, and clock out at 5. To me, the information is my work, and I enjoy processing and analyzing the information. So, I’m all the time … you know, even if I’m not in front of a computer screen, my mind is working on things. I’m thinking about how this piece fits with that, and what would happen here, you know?
Jay Sparks: Sure, sure.
Mark Elliott: I’m always working on something.
Jay Sparks: Yep. Well, every good business person is, right? The key is to get something that you like, so that it’s not drudgery, and you can sustain yourself through the times when things do get difficult, as every business has its difficult times.
Wow, this is really incredible. I have probably a hundred more questions for you, but I think this is a lot to take in on the first round here. This is really just the first two of many really incredible calls that you’ve made, but I wanted just to highlight a little bit of your process, and how it’s consistent, it makes a lot of sense, any good business person follows essentially the same process that you follow, you just happen to look at many more opportunities, because you look at everything that is right now publicly available. It’s really amazing, and having worked with you directly the last few years, it really is incredible the amount of work that goes into finding one of these gems. Everyone always likes to talk about after the fact, but no one likes to do the work. Finding is one thing, but then implementing the idea is also not always cut and dry and easy, right? There’s a lot of things still you had to overcome. So, definitely looking forward to working on finding the next big idea with you and sharing it with our loyal followers in real time.
Jay Sparks: Is there anything else that you want … any closing comments on this first call you made that I missed, that you’d like to share?
Mark Elliott: No, no. I think we hit on two major events, and there’s quite a few more to go to, so I’ll look forward to discussing them with you.
Jay Sparks: Excellent, great. Thank you everyone for listening to Finding Unique Value, and we look forward to the next time. Bye for now.