“The time to buy is when there’s blood in the streets.”
– Baron Rothschild
The Rise of the Bubble Economy
Within the past decade, we’ve witnessed one of the greatest rises in real estate prices and one of the greatest falls. We witnessed the same thing with the stock markets during the tech boom and the crash in 2008. We saw Citibank’s stock falling from $50s to 97 cents, only to go back to $4. Arguably we are living through bubble economies and the only way not to lose your shirt, it seems like, is to buy when there’s blood in the streets.
Obviously this is easier said than done. We don’t have a crystal ball for the future and hindsight is always 20/20. However, we should start training ourselves to recognize when there is euphoria and when there is panic. Recognizing the signs and reacting to them will play an important role in our lives as we seek to build wealth for our future.
Investing in Panics is Not Quite the Same as Being a Contrarian Investor
It is important to note that recognizing panics and bubbles is not quite the same as a being a contrarian. Just because the crowd is running one way doesn’t necessarily mean you will gain certain profit running the other way. One of the important aspects of investing successfully in bubble economies is that you have to be rational.
No. Time and time again I’ve seen people act irrationally, especially at the height of the bubble. Sometimes even the most rational people will give in to what the crowds believe and divorce themselves from the fundamentals. What doesn’t seem to make sense suddenly does. Admittedly, I was fortunate enough to not be in real estate when the crash happened, but I could imagine the temptation of rising prices and not missing out the boom overrode many people’s common senses. I would probably fall in the same trap had I been in that situation. Nevertheless, I knew it would be risky. I imagine everyone else hoped the music would just stop a bit later.
Investing After a Bubble Burst is a Lot Safer Than Riding the Bubble
While we should always be wary about getting caught in the rise of a bubble, I think it is a lot worse to avoid investing in something after the bubble has burst. Perhaps it is the loss aversion in human nature that comes into play. But whenever a bubble bursts, the fall is a lot more extreme than it should be. In 2010 and 2011, housing prices had dropped to a level that was hardly believable. There was blood in the streets. No, it was more like a bloodbath. Yet tons of people swore to themselves to never touch the toxic stuff again.
Even today, as the opportunity to buy real estate at the lowest dissipated and housing prices begin to rebound, I still hear people say “Oh my, why would you be in real estate right now?” Needless to say, when I started investing in real estate in Las Vegas in 2011, I heard from plenty of naysayers who questioned my sanity.
But there was blood in the streets!
Investing in a post apocalyptic environment is a lot safer than investing in a growing bubble and trying to get out at the right time. At that point I believed prices just couldn’t drop any further (I would’ve been happier if it did though). Homes could not be built in that price range. The population was still growing and people still needed places to live. Some streets the entire block had signs. But people weren’t leaving the city (well, maybe except for Detroit…). People were more or less still around. Plus, you could get 10% return on single family home rentals after expenses in a good neighborhood! The fundamentals were sound. It was almost too good to be true.
Yet people were afraid. They thought prices could fall even more. They thought real estate was a horrific investment. So they waited.
Stop Waiting and Take Action!
And now, when the prices are rising rapidly and homes are extremely difficult to get a hold of, people suddenly have become interested in real estate again. But the real party is over. The fear has gone. The opportunity is still good now, but it is nowhere like it was before.
The greatest wealth has often been built from the panics on the street. When the fundamentals are good, you cannot let the prevailing panic force you into inaction. You have to take a leap of faith to seize the opportunity. You have to assess a situation rationally. Learn the fundamentals. Dissect the fundamentals. If it works, you gun for it with all your conviction. Don’t let people around you put doubts in your head. They are the ones who are scared. They are the ones who are going to miss out the next great opportunity.
So the next time there’s a bloodbath in the street, don’t be afraid to go for it. It will be your safest bet (metaphorically of course. Don’t ever gamble). Oh, and don’t share this with too many people. Once everyone understands this there will be no more blood in the street.
Photo: ClickFlashPhotos / Nicki Varkevisser