Screw Hope – I Got Faith!
“The Waiting Place…
..for people just waiting. Waiting for a train to go or a bus to come, or a plane to go or the mail to come, or the rain to go or the phone to ring, or the snow to snow or waiting around for a Yes or a No or waiting for their hair to grow.
Everyone is just waiting.
Waiting for the fish to bite or waiting for wind to fly a kite or waiting around for Friday night or waiting, perhaps, for their Uncle Jake or a pot to boil, or a Better Break or a sting of pearls, or a pair of pants or a wig with curls, or Another Chance. Everyone is just waiting…”
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HOPE is a word that is thrown around a lot in our society. Seemingly every layer of our societal consciousness from family, to church, to politics is inundated with the message of hope. Personally, I tend to think that we confuse faith with hope:
Belief that our actions will, in the end, lead to achievement of the stated goal.
Illogical and misled assumption that something good will happen just because we want it to happen, without our material involvement.
Faith is hard, but hope sells. And how could it not, it’s something for nothinb… well – I am here to tell you that while most people’s investment strategy revolves around a lot of waiting and hoping (and a fair amount of misguided prying), I prefer to have faith in my capacity as an investor.
Case in Point
My mother and father-in-law visited us for week not too long ago. As the conversation ventured into all things investing, my father-in-law tells me with an apparent aura of satisfaction that his 401k grew a whopping 20.9% so far this year. Two days later it was up 23%…
Do you think I am impressed by that – I asked him? We have gone from 6,500 on the Dow Jones up to all time highs of over 15,000 in the space of a few short years, without there being any legitimate underpinnings for it in the real economy which is limping along on three cylinders.
As I survey this situation I am aware of several realities, some more obvious than others. One is that if you drop enough currency out of your helicopter, you can inflate the numerical value of the equity markets. Another is that there is no longer a relationship between the health of the real economy and the equity markets. In fact, I've heard it said the markets don't want the economy to do better as this would put an end to cheap money and the markets would have to prove their worth without artificial priming, which they are scared to death of. But most importantly, there is this lesson:
That which is given to you without merit, can be taken away quickly!
I said this to my father in law, to which he responded: “I have to take it from where I can get it.” NO!!!!!!!
I refuse to walk the line toward the inevitable cliff alongside the rest of the lemmings in this investment universe. I refuse to hope and pray that my equity goes up and stays up. Instead – I make sure it does! Slowly, patiently, methodically I work my plan to ensure that equity grows on my balance sheet…
In general I am very underwhelmed by equity as any kind of a measuring stick of investment returns; my capacity to live life is very much a function of income, not equity. However, I do have my reasons for wanting the equity on my balance sheet to grow.
To an extent, equity does grow automatically in real estate over a long period of time due to inflation – as the currency becomes less valuable, it takes more currency to buy all assets including real estate. Theoretically, all real estate benefits from this, although in practice this "automatic" growth is often impeded due to poor desirability.
Additionally, equity grows automatically whenever we utilize leverage to purchase, since over time we typically pay-down the balance of the note. And when it comes to income-producing real estate, it could be said that our tenants pay-down our mortgage for us and buy our equity in doing so – we should say "Thanks!"
But, these “organic” methods of generating equity are too slow for my taste – I like to ensure, or force growth of equity at a much quicker clip. One way I do this is by applying all of the principals of expandability, some of which I’ve discussed in other articles here on BiggerPockets. Expandability allows me to force the appreciation of the asset thereby improving our equity position – it allows me to move the top line.
But additionally, I lower the bottom line by simply choosing to allocate the realized cash flow into positively amortizing my notes. I dump all of my extra cash flow, and by that I mean all of the cash flow above and beyond the liquid reserves, into paying off mortgages. Of course in doing this I follow a specific strategy, but that is a topic for another time.
Most of you know that I am a big proponent of leverage, which allows us the privilege of entering the rich man’s game with very little seed capital. Having said this, I am not oblivious to the fact that owning equity affords many options.
Too many of our fellow investors do not bring to this game a long-term perspective. This is a mistake in my opinion. I believe that while we are young we should be re-investing as much of the realized cash flow as possible, because successful investing is first and foremost about HAVING OPTIONS, and we should never HOPE for results – we should ensure them, even if it means sacrificing today for the benefit of tomorrow…
HE WITH THE MOST OPTIONS – WINS!
Photo: Prem Anandh