I have been through a few market swings in my tenure on this earth. I’d bet you have too. And, I bet, you have read and listened to a ton of advice on what to do when the market is up and what to do when the market is down.
Some of the advice probably was absolutely right on while the rest of it was simply somebody’s opinion and without much merit. That is about par for the course and you can expect to hear the “do this” and “don’t do this” birds chirping in every market.
I propose the one characteristic ALL investors need is patience. The old advice that says something like slow and steady wins the race seems to be true no matter how many banks and/or investment firms close their doors or how many foreclosures hit the market. If you work at one of these going out of business facilities your outlook may be a tad bit different.
Wall Street is the home of many myths but also the home of one fact that has remained true as long as records have been kept. I would suspect this fact is as true for real estate investing as it is for stock investing.
That one glaring fact says investors tend to rush in at market tops and out at market bottoms. I can’t speak for every locale in the U.S. nor for every investor but I noticed here in my backyard that fact was much in play.
I say that because I’ve attempted to contact some of the so called players who were in action at the top of the market only to get disconnected phone numbers or when I do reach one, I hear how tapped out they are at the moment.
Heck, “at the moment” is merely a euphemism for I lost my keister and have to find two jobs just to pay my bills. No, I’m not making fun of, or talking down about, anyone, I’m simply relaying my very unscientific findings.
Facts are facts. A lot of investors are on the side lines because they didn’t pay closer attention to several other factors. Important factors if I do say so myself.
The Law Of Balance
In my humble opinion, an investor should maintain a portfolio balance no matter what the market condition. I’m not talking about stocks, bonds and mutual funds only. I’m talking about real estate categories coupled with other money machines.
Tough markets can really skew your financial perspective if you don’t utilize the law of balance. I’ve mentioned a few in previous posts. Such programs as CDs, TIPS, annuities come to the forefront and are easy to grasp without any explanation.
That’s what I’m talking about. I’ll use one fellow as my example. As the housing market was roaring, I asked him in what other arenas had he put his profits. SFRs man and lots of them was his answer. He even had one of those evil grins, ala Bruce Willis or Vic Mackey, on his face as he replied.
When the housing market tanked, he was one of my first incoming calls. He needed to sell and sell fast so he could save his residence from being foreclosed. His “balance is for the other guy” mentality came home to roost in a big way.
What he never even considered in his investment adventures was the next investment principle one should know like one knows the back of one’s hand.
This Thing Called Value
This poor chump didn’t quite grasp the value principle. He assumed value had only one side. As you and I both know, value is a multi-sided-algebraic-pythogorean-aritotle-socrates animal. Or something like that, right?
Why would I buy his properties at the sand based foundation housing value existing at that time? I wasn’t a professional prognosticator – and still aren’t – but I did know house values were dropping and the free fall period was at least several months in duration.
The point is not how smart I am. The point is value for me wasn’t determined at one point in time based on one need in time. Even the boys on Wall Street don’t rely only on the price to earnings ratio to value a company.
They use up to twenty other paramters. That was a given yesterday and will be a given tomorrow. The real estate market shouldn’t be any different.
The real estate market offers one bennie not found in too many other markets. In the real estate market, you can afford to be off by a few thousand dollars per asset and not get hurt very bad in most downside markets.
The dollar value per property that’s why. Pricing is always in the thousands. When it falls, it falls by thousands. When it rises, it rises by thousands. Stocks on the other hand aren’t priced that way. bonds aren’t priced that way. Mutual funds aren’t priced that way. Hence, the dollar value of real estate lets you make a several thousand dollar mistake and come out with a profit.
For example, I have my eye on an REO about three blocks from my house. It has fallen by over 100K. I’m not sure if it has hit bottom but I know if I bought it at current asking price and I was wrong, I more than likely would be wrong by about 20K on the down side.
To the amateur investor that sounds horrific. My God, that’s 20K down the drain or some such sort of (ir)rational thought would be hurled in my direction.
To the experienced investor that may or may not be too bad. 20K is easily recoverable in an upswing with the one minor stumbing block being the amount of time to recover that 20K. I’d probably have to wait an extra three to six months given the velocity of the upswing.
The purist would call me ignorant for not waiting till it bottomed out. However, I have yet to meet a successful purist so I never pay attention to anything this breed has to say.
Here’s my bottom line – if you are patient and employ balance in your investing endeavor and understand value as it exists in your field of expertise, you should do fantastically better than my above mentioned friend.
Truth is you probably are still doing above average in your field while everyone else is mystified and wondering what the heck is going on. These are the people looking for a bailout that will never materialize.
Photo Credit: epicharmus