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History Doesn’t Repeat Itself but it Does Frequently Rhyme

by Michael Zuber on October 8, 2012 · 10 comments

  
The Great Depression

To say we are in or entering a time of uncertainty is an understatement of massive proportions.  However, you can either let the uncertainty cause paralysis or you can take action by reviewing historical times of great upheaval and apply the lessons learned.

While I believe in staying current on all of the hot topics, I find it a lot more valuable to review history to see how things worked out in the past. Most importantly, I try to figure out what strategy made the most money (and lost the most money) to see if I can exploit it again in the current market.

I utilize the following three prong approach to review historical facts:

First – I want to talk to anyone and everyone that lived through and profited from it.  For example I have talked to dozens of older investors that profited from the 80’s crash in real estate.  I have talked to them about what worked, what didn’t and what they wished they’d done differently — this last question being the most important for me to understand.  In addition, I talk to these investors about what happened when Interest Rates went to 15%+ and how they survived and prospered.

Second –  I read any and all books written about periods of time like the Great Depression, the Civil War, the rise and fall of Japan, etc.  I strongly believe if we pay attention to the past and stop being so arrogant and thinking “This time it’s different,” that we can prosper by learning and applying historical events.  While I agree that the scale and scope of our issues are bigger, I disagree that we have never seen anything like it before. We can all learn from the past.

The final area I dive into is any biography of a successful investor or business owner regardless of time frame.  I figure if you can learn how they started, the challenges they faced and how they succeeded, you will be better off.  The interesting fact about a lot of the biographies I have read of late, is that many great investors and businessmen started their business during the Great Depression.

To close, I must ask the reader some questions that are top of mind today:

  • Are you afraid of interest rates exploding higher? If so, do you know what happened to the real estate market when the Fed raised interest rates significantly in the 80’s?
  • Do you know what impact huge and very liquid hedge funds can have on the market when they are chasing returns as low as the 7% range? If so, do you know who prospered during the RTC days of the Savings & Loan crisis? (Hint: big money guys)
  • Do you know what happens to real estate prices when inflation and interest rates rise? There are many online sources that will actually surprise you with the answer as it is counter intuitive.
  • Do you know what happens when real estate goes from being a “leper” to the “holy grail” of investing? People chase trends and they hate to feel left behind so a few positive years will be followed by more positive years.

In the end, I believe an investor needs to learn as much as they can about the past to prosper in the future.  Also – please stop saying “This Time it’s Different” because it isn’t!

Good Investing

Photo: Tony Fischer

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{ 10 comments… read them below or add one }

Dale Osborn October 8, 2012 at 9:58 am

Great article on learning from the past. Almost the same as learning from the mistakes we make as investors.. There is always a lesson to be learned so we do not keep making the same choices or mistakes over and over again. Some feel real estate runs in cycles and they try to time it to get in on the up side and get out before the down turn starts or gets too bad. Some are in for the long haul and could care less about how things are going today as they have the cash flow from their rentals as a cushion for the economic bad times.

Reply

Mike Z October 8, 2012 at 12:13 pm

Dale

I agree the most expensive mistakes are the one’s I repeat!!!

Good Investing

Reply

Curt Smith October 9, 2012 at 8:16 am

I’m interested in the answers to this article’s important and soon to happen questions?
– what happens when interest rates rise? Near term I’ll guess prices rise as over hung demand rushes into the market.
– I’m in Atlanta competing with hedge funds for more rental properties… So what are some folks thoughts on the end of this? I’m completely certain the hedge funds / buyers of these securities will blow up yet again. There’s no way renters will say passive and obediently pay on time every month knowing it’s some org in China / Australia that holds their tinny little lease… It’s the middle years (months) that are currious. Will they chase good renters by dropping rent and offering free washer/dryers like the multi-family properties? Or will they keep rent constant to keep their cooked books the same cap rate on paper and give free months?
These idiot hedge funds are not going slow to minimize their impact. They put 3 month windows on their hired buyers / managers to deploy a zillion $$ in just a few GA counties. It’s hard to believe that so little was learned from the 3 yr ago blow up.

curt

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Ali October 11, 2012 at 7:46 pm

Hi Curt,

Where/what are you investing in around Atlanta? I’m from Atlanta, live in Los Angeles., but here in Atlanta while the market is crazy. I’m working with the turnkeys.

Ali

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Curt October 12, 2012 at 6:20 am

Hi Ali. I watch some of the turn key props same low high school ratings as the SFR bundlers. My view is that the individuals holdings will run into the same problems that the SFR bundles. Just like the MBS history. How history not repeat? The cap rates are being dressed with lipstick just like tranching did for MBS.

My model keeps me in top high schools.

Curt

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Arthur October 9, 2012 at 10:11 am

Mike,

I love this post! I have to admit, I was hoping you would share some of your conclusions. Perhaps, I may have to reach out to pick your brain. The item I am most interested in, is the impact of hedge funds in the market. They have definitely changed the landscape in my market and I am wondering how to either compete or find an alternative strategy.

I’d love to hear your thoughts some time either in a future article or over the phone.

take care!

AG

Reply

Mike Z October 12, 2012 at 12:35 pm

Hi Arthur

Thanks for the post. I see the topic of my next article.

But as always call any time if you like

Good Investing

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Ali October 11, 2012 at 7:48 pm

Very good blog, and very thought-provoking! I’ve recently started getting a little worn out from reading my normal real estate books, as a lot of them start sounding similar after awhile, so maybe I should start reading up on the answers to your questions. Do you have recommendations on the best avenues to learn a lot of this? Resources you can recommend?

Reply

Mike Z October 12, 2012 at 12:36 pm

Hi Ali

First thing I would do is figure out which question or area stikes home the best. Then I would look for a time in history where that event or similar event happend and then I would start reading as much as I could. Then I would repeat with every new question

Good Investing

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Karen Rittenhouse October 26, 2012 at 8:23 am

Mike-

Yup, and “those who do not learn from history are doomed to repeat it.”

I have not studied historical real estate cycles, but now I will! Before becoming an investor, I did study the wealthy (read lots of bios and autobiographies) and how people acquire generational wealth. Hence, my dive into real estate. But, I didn’t take my historical studies beyond that.

Thanks for the insight!

Reply

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