IBM's earnings per share, Wall Street's favorite stock picking criterion, grew more than three percentage points per year above the growth of Standard Oil from 1950 through 2005. As information technology advanced and computers became far more important to our economy, the technology sector rose from 3 percent of the market to 15 percent.
In contrast, the oil industry's share of the stock market shrunk dramatically. Oil stocks comprised over 20 percent of the value of all stocks in 1950, but fell to under 10 percent by 2005.
If a genie had whispered these facts in your ear in 1950, which stock would you have bought? If you answered IBM, you have fallen victim of the growth trap.
Although both stocks did well, investors in Standard Oil earned 14.46 percent per year on the shares from 1950 through 2005, almost 1 percent percent per year ahead of IBM's 13.09 percent return. Although this difference looks small, $1,000 invested in the oil giant in 1950 would be worth over $1,800,000 today, while $1,000 invested in IBM would be worth $867,000, less than one half the amount in Standard Oil.
The fact that the long-term return of Standard Oil beat IBM is not a result of the recent surge in oil stocks over the past two years. When I compared Standard Oil's return from 1950 through 2003, I did in my book The Future for Investors, IBM still lagged by a significant amount.
Every market has boring laggards or beaten down stocks and beaten down sectors. And every market has a new company building a moat around its primary business which is booming. You just have to find those stocks which are true "dividend" stars or emerging from "growth stock" into a dividend star, buy them when they are "cheap" (this is a perfect time to buy Microsoft (Nasdaq:MSFT) in my opinion), let their growing dividends re-invest quarter after quarter, and someday, 15, 20 or more years down the road, you will be sitting on loads more shares of the companies, their share price is also higher, and if you are doing the retirement thing, you simply begin to cash your dividend checks instead of re-investing them.
(And let me say one more thing: if you are 25 years of age or younger, you have time on your side. For me to make as much off every $1,000 you invest, I have to put $64,000 into a stock to be "even" with you by my 75th birthday matched to your wealth in your 75th year. If you are young, open a Roth IRA today, and start dumping small bits of money into it every month. I will tutor you into being a millionaire before your 40th birthday. You will thank your lucky stars that you had a father figure such as myself who could tutor you at your early age.)
What Dr. Siegel's Research Tells Us Will Astound the Growth Stock Chasers
Siegel tells us in his new book that 3 of the 10 "sectors" of stocks which have been around for 50 years or more have paid off much better than all others:
- Consumer staples such as toothpaste, soap, beer, food.
- Energy for cars, homes, and factories
- Healthcare
As Siegel further explains, some of the biggest mistakes are chasing growth stocks, tech stocks, consumer discretionary stocks, housing stocks, etc. All of these sectors are filled with Johnny come lately stocks which supersede the "old dog" companies which were in the S&P 500 for years. And the biggest mistake 90% or more investors make is chasing new arrivees to the S&P 500, instead of investing in the sleepy old "tried and true".
Siegel also goes on to quote the man who gave the stock market of 2000 the term "irrational exuberance", Professor Robert Shiller, who is now calling the housing bubble a much bigger and more dangerous bubble than the stock market of 2000.
Meet Robert Shiller, the Brilliant Economist Who Called the Tops for the Internet Stock Market Bubble and the Recent Housing Bubble
Understand how good Professor Shiller is: he told us just a few months before the current Housing Bubble top (Summer of 2005 by all accounts) that this Bubble was not "sustainable".
Schiller is also a rare kind of an Economist. He's a longterm view historian.
Back in April 2005 he wrote the following about the 1887 Housing Bubble in Los Angeles with a thought as to what he predicted would happen to the Housing Bubble of 2005 . . . which many Realtors claimed was NOT a bubble:
It is useful to think back to the first major real estate bubble in Southern California, which took place in the 1880s. This bubble, which peaked in early 1887 and afflicted all of the region, notably Los Angeles, is well documented in the Los Angeles Times of that time: "People poured in by thousands and prices of land began to climb. Everybody that could find an office went into the real estate business. ... Desk room was hired in stores, in hallways, wherever room could be found. ... Tracts of lands were cut up into lots, the further enormous rise in values was predicted, auction sales were announced ... rattle off the lots and have another sale.''
So what brought this bubble to an end in the fall of 1887?
It cannot have been the Fed raising interest rates - there was no monetary authority then. Nor was it a major economic disruption. There was a short national recession from March 1887 to April 1888, but not a notable one.We do see a change in attitude, an increasingly vocal list of doubts, reflected in the press accounts in the fall of 1887.
In November 1887, the Times quotes a salesman for a Southern California real estate firm operating in Chicago: "Everybody has heard about the boom in (California) real estate, but they want to know what there is behind it. ... (They ask) You think then that the present growth in Southern California will continue?' Most assuredly.''
The Boston Evening Record wrote in the fall of 1887: "In almost every suburban town around Boston, parties are being made up of people who are going to Southern California, there to spend the winter or to settle permanently. ... But to those who are selling out their property here in the East with hope of making a fortune in California real estate within a year after they reach that latitude, the Record offers the advice to go slow.' Southern California may be the most perfect garden on Earth, but the way things have been going there for the past three years is pretty good evidence that the slump is coming before long.''In less than a year, this floating of doubts about the boom morphed into a sense of real disillusionment.
In November 1888, the Times wrote after the bust: "We must avoid the rotten methods, inflation, unhealthy speculation and ephemeral booms. ... We believe this is now the feeling of nine-tenths of our people. ... The wild scenes of twelve and fifteen and eighteen months ago are in no danger of being soon repeated. Possibly we may never look upon their like again. If so, so be it!''
Well, we are looking upon a real estate boom again, and we are likely to observe the same end to speculative feeling, at least before many years have passed. Human nature is unchanged. In a bubble, high prices are sustained only by the expectation of more high prices. That is what makes a bubble a bubble, prone to bursting.
The reason we cannot expect a soft landing today is that right now people are willing to pay these very high prices only because they expect them to go up even more in the future. Prices can't just level off, because when people no longer expect them to go up, some of them will not want to hold at the high price.
Robert Schiller's comments above were under an April 2005 headline, "Housing Bubble Will Pop." (I emboldened his last two paragraphs to show how prescient his view was back in 2005).
Schiller nailed another "market top" months before it happened. The man's brilliance was once again laughed at by Realtors, Homebuilders, Lenders and other vested interests who depended on the Real Estate Bubble to never burst.
How I Used My New Powers on Analysing the Stock Market as a Template to Correctly See Through the Housing Bubble Fully Inflated in 2005: or Dummy Did the Math
Two months before this article of Schiller's appeared on the Internet, two friends of mine bought "homes" which I felt would lose value very soon.
One of the homes is now worth $120,000 less today than it was appraised at in Februrary 2005. Mind you, this is also after the couple put $20,000 into sprucing up their purchase . . . which was done with No Money Down/No Documentation/Interest Only/ARM Reset in Year Four type of Loan.
The other homebuyers are stuck in a "condo" in a part of Old Town Key West which flooded. Although the female in this couple works in a bank, this woman signed her life away on a hybrid ARM loan with small "teaser" rate for the first 3 years (she actually put down 5% toward her purchase of a 600 sq. foot "attic" with ceiling slanted at steep pitches on both sides of her "tube" condo. Her boyfriend hits his head on the ceiling every time he stands up) and next February, her loan kicks into an ARM which will almost double her current payment of $2,400 monthly for the right to have the title "homeowner".
(By the way, this couple moved from a spacious apartment in Old Town which used to cost them $900 per month rental. They lost their apartment when their landlord died. The woman in this relationship fretted that if she and boyfriend/common law husband did not buy Key West Real Estate in 2005, that they would "never be able to afford it" again. She works in a locally owned bank where the mindset at that time is "Key West Real Estate always goes up in price."
Months preceding her purchase, Bascom Grooms IV, current president of the Key West Realtors Association, was quoted in the Key West Citizen saying we would never see a house sell for less than $600,000 again in Key West proper. Today, Mr. Grooms is buttering his bread selling the cheapest homes and condos in Key West. Many of these "homes" asking prices are below $500,000 and many of his condo listings are below $300,000.)
Meanwhile, I and my girlfriend had long discussions about "buying vs. renting" Real Estate in Key West. She and I both agreed that Key West Real Estate could not continue to double in price every 3 to 5 years as it was doing from 2001 through 2005. We did the math. We took a $550,000 "home" and doubled the price 6 times through the future of a 30 year loan.
By 2035, this "home" would supposedly be worth $35,000,000 had real estate in Key West continued to keep doubling every 5 years as Realtors said it would in 2005. Dumbasses. Liars. Frauds. Whatever you call them in your mind, Realtors were selling the public Snakeoil Dreams back in 2005.
My girlfriend and I agreed, "This doubling of real estate every five years is not going to continue. This insanity is not sustainable." We figured tens of millions of future homebuyers would not be able to afford a $35 million home. And not even millionaires are so stupid to pay $35 million for a house with less than $150,000 materials in it. And what millionaire wants to pay taxes and insurance on a $35 million home?
That was our simple, lucid, against the crowd thinking in 2005 when all of Key West was mad for Real Estate. We were a small minority of people, maybe 1 to 5% of our population, who knew Bad Times for Real Estate were right around the corner. But anytime we spoke our beliefs, we were ridiculed.
Did we ever meet a single Key West Real Estate Cheerleader who simply "did the math" on their own and who would share their disbelief that housing could not possibly continue its mad rise in prices?
Are you kidding?
A cheerleader ignores reality. They continue to cheer the "home team" even when they are losing 60 to 0 with two minutes remaining in the fourth quarther. Plus, when a cheerleader is making big bucks of your ignorance, there's only one thing to do to keep the game going: cheer some more.
So while others were losing their heads and chasing the Housing Bubble Money Train, I and my girlfriend stayed with our tried and true method of buying "safe" stocks which will weather any Recession or Depression, while buying a few "high-flyers" to boost returns in our very diversified stock portfolios . . . .
Using our method of diversifying a few high-flyers with dividend paying stocks, we have never made less than 21% on our portfolios in any year. And we beat the S&P 500 averages for all four years we've been investing smartly. One year, in fact, we beat the S&P 500 by a full 30%!
A Couple of High-Flyer Stocks I Bought in 2005 Which Have Smoked the Returns of the Housing Market Since Then . . .
I've owned 100 shares of Akamai (Nasdaq: AKAM) since $12.00 a share. Back when I approached people at Motley Fool about this company, few listened. The reason: Akamai was a former "darling" of the Internet Bubble which exploded and took out trillions of dollars in equity. Investors had trouble understanding that even at Ground Zero of the Internet Blowup, there were still a handful of outstanding stories warranting a closer look now that the fire, smoke and radiation had gone away.
Those Akamai shares of mine are trading at $54.83 today and people on Motley Fool are still urging me to "take some profits". (These gains are only two years old.)
I am not taking profits on Akamai as I continue to do my homework on their growth. I'm not Tommy, the deaf, dumb and blind boy. I am Rock, the man who takes full responsibility for my decisions in picking and staying with stocks.
To me, selling Akamai now is the wrong advice.
Akamai is a HOLD in my book. And if it drops down the $30.00 region, that is where I will wade in and buy another block of 100 shares.
That's how confident I am of its business future. Retailing on the internet is growing by tens of billions of dollars every quarter. News organizations, music and film are being sold via the net. More people surf the internet to learn about housing than ever before.
Buying Akamai is a bet on the future of the internet. And this purchase was made AFTER the Internet Bubble burst, not while it was in full swing.
This kind of "Buying at the Bottom" thinking is ingrained in me now after I studied many a great investor's thinking. I had to lose many extra tens of thousands of dollars in stocks which were "winners" and which I sold without letting them run. But my self-education in how to correctly invest is worth every penny I lost in the "old days of ignorant chasing the Bubble."
Akamai has a huge moat around its business and it is one of the very few tech stocks which I see thriving in any economy, good or bad. This company is a "Rule Breaker" which is now becoming a "Rule Maker" in its business.
This is a company which will be around for a long time as they are re-investing millions of their profits back into the business, buying up smaller companies with interesting niches which Akamai never had, and paying cash for these businesses from their money making machine which is now just kicking into gear. (Akamai only turned a profit a little over two years ago, and now they are off to the races.)
Akamai's name is stellar with people who use their proprietary methods of helping company websites to never lockup during high traffic times. (Think of Akamai's main business as offering a "turnpike" to high traffic websites, so that surfers are never slowed by "traffic jams".)
Microsoft uses Akamai for its downloads. Apple uses Akamai. ESPN uses Akamai. The NBA uses Akamai. Name a big company with big presence on the web requiring mission critical support from logjams 24 hours daily, and you will most likely find Akamai behind the scenes.
When I think of Akamai, I think of the guys who sold pickaxes and jeans to the 49ers who flocked out West to find gold.
Better Than a Wildass Stab in the Dark, a Tame Studied Speculation with Disposable "Betting" Money Is Paying off Big
Another of my stocks, Calpine (Nasdaq: CPNLQ) is still working out of bankruptcy.
I know many investors who will never touch a stock coming out of bankruptcy.
But I study history. By studying history, I have a leg up over 99% of investors in any market.
One of my mentors, Jim Rogers, is a billionaire who made his billions working as a trader for George Soros. Rogers now leads his own commodities investment firm and funds. He is alsoselling his home in upstate New York to move to China. I watched an online video intereview with Rogers about a year ago in which he said he would teach his children three things to succeed in the 21st Century:
- How to think critically for themselves without being spoonfed crap from experts and authority.
- Mandarin Chinese
- History
Watching that interview lit a fire inside me. I couldn't agree more with what he said if I had children of my own.
I feel that third item, History, should be driven into the skulls of all people, no matter their age. Most Americans can't remember as far back as 2000 when the Nasdaq stock market lost over 80% of value and wiped out trillions of dollars of value.
History can work to your advantage. If you lost big money during the Nasdaq trainwreck, yet you studied how others continued to not only survive, but thrive, you became aware, "Jesus, this making of money the old fashioned way sure isn't hard. Why didn't I see how this dividend re-investing in great companies really works long, long ago?"
The magic of compounding dividend re-investment returns needs to be taught in American grade schools. The nightmare of compounding interest which works against you needs to be studied too.
I had to learn all this on my own dime. It took many hard lessons of losses in the stock market to have "value" and "dividend" investing instilled into my mind as the safest way to make money off stocks.
Looking over bankrupt companies, I realized the time to buy was not when the company was promising vaporware and living off smoke and mirror profits attached to future outlooks. I realized the time to buy a troubled company is after it comes out of bankruptcy, is starting to turn real profits and is working with creditors agreeing to cut them slack.
I saw what happened with K Mart and several other companies which did come back despite Enron, World Com, and others going totally bankrupt. I studied both the failures and successes of Chapter 11 companies.
Calpine was a very risky buy that I would not recommend to any novice stockpicker or even friends or family. Eventhough I felt very good about the developing story of creditors working with - not against - Calpine, I still did not want to bang the table for friends and family to "buy, buy, buy," as Jim Cramer would do today on every other stock in the S&P 500.
On Motley Fool boards, I simply logged in my buy as a "Guilty Pleasure" bet that I didn't want anyone else to try. I told readers of my posts that I was willing to see Calpine blow up in my face. "Don't do what I am doing," is the message I clearly put down time and again in print.
I bought 500 shares of Calpine at .28 cents a piece in December 2005.
Today each share is worth $3.75 per share.
Thus, I have 500 shares of a stock at this moment which are up 1300% in a little less than 17 months time.
(I don't know a freaking house or hunk of land which went up this much in less than year down here in Key West.)
Today, Calpine is a less riskier buy, hence, a higher price is attached to it as institutional buying is picking up on the story with much less risk.
I'm getting paid for being "early" on the story. I took a risk bigger than people buying the better story of Calpine today. Yet, know this: I did not feel strong enough about Calpine in December 2005 to put down $1000, or $5000 or $10,000 in a bet. Had I put down $10,000 in December 2005, I'd now have $130,000 sitting in my brokerage account if I cashed out.
But I only invested $150.00 because I had to assess how much future Pain I could endure if I lost everything on my bet. I would not miss $150.00 if I lost it all. But if I put down $10,000 and lost it all, man, I would . . . and should . . . be pissed at myself for gambling away so much money on such a risky bet.
I've lost big in the stock market before, I could lose again. Hence, I played Calpine as a "winner take all" bet. A winner takes all bet is the same thing as saying, "Never bet more than you can afford to lose."
Today, even with its improving story, I would not recommend this stock to any novice buyer. I feel the stock has gotten ahead of itself. And I am prepared for a 50% drop from today's price.
This thing could still blow up and leave me penniless. But I feel better about this company today than when I first bought it.
Why I Am Taking Time to Look Over Two of My Riskier Stock Market Investments
I'm laying out my truthful thoughts here so that novices might learn "How does a successful stockpicker play the stock market?"
Great stockpickers who take these highflyer bets every once in a while "diversify" their portfolio. They mix it up. They don't put all their eggs in one basket.
Playing a wild bet every once in a while is only a very tiny part of my portfolio. This time, it is working out. Next time might be a total "wash". But if I lose a bet on the next Calpine, its loss effect won't even mean a 1% total loss to my whole portfolio.
There is something else to take away from the two story stocks I did not "luck" into, but which I bought with guts and real money . . .
The Bigger the Risk, the Bigger the Possible Gain: When You Make a Risky Bet, You Better Have Done Your Homework
You have to take on greater risks in any market to win big. On the riskiest bets, you have to be willing to lose it all on money you don't really need.
I hate to lose money in the stock market, but I still prepare for losses and cut them short when they do appear. Still, I don't buy possible highflyers blind. I do a load of research and thinking. And, I only wager a bet that I am comfortable losing.
The bet on Calpine cost me the price of a normal Super Bowl wager: $150. Instead of betting on the Super Bowl in early 2006, I bought Calpine and said, "I'll hold it whether it goes bankrupt or goes up in price. Either way, no big loss to me as I would have most likely lost the bet on the Super Bowl anyway.
But I still did a ton of homework on Calpine before buying. I spent hours pouring over conference calls, news releases, quarterly reports and the like.
Calpine and Akamai are two of my three biggest "gainers" in the past two years. But when you average them in with my slower, safer, more steady gainers, you can easily understand I prefer investing in steady eddy, boring dividend paying stocks over investing in tech stocks, IPOs, multi-level marketing scams and espcecially "The Housing Miracle" or "Housing: The American Dream".
Remember When You Were a Schoolkid and You Hated Doing Homework?
That is why so many millions of Americans are crying the blues about Real Estate these days: they didn't do their homework.
They wanted someone else to do it for them. Now that their housing "investments" (bought on Zero Down, Interest Only No Doc Loans Backed with an ARM) are exploding in their faces while they are faced with foreclosure, they want to blame their bad life choices on "my dog ate my homework."
True, there were (and still are) many slimy lenders, Realtors, and so on who preyed on these lower and middle class people who are now singing the blues and laying blame on everyone else except themselves.
However, I also wonder "Where are the adults?"
When people take the biggest purchase of their lives . . . a home . . . and they don't do any homework before they purchase, should the government be talking "bailout" for all those losing their homes?
WTF?
When did "investing" (as the NAR claims housing to be) become totally "RISK FREE"?
(Where's the government to re-imburse me for all those stupid losses I incurred during the 2000 Internet wipeout? Instead of crying, I used my anger at myself to fuel my passion to conquer the stock market. Now I know why great stockpickers always say, "You got to lose money in the stockmarket before you can being to learn how to make big money." How true that maxim is.)
In my mind, many of these newly poor ex-homeowners had runaway greed glands pumping visions of "instant wealth" into their hasty decisions.
Everybody was buying Real Estate not long ago. Your taxi driver. Your barber. Your gynecologist. The hooker on the corner, the drug dealer selling cocaine to the hooker, the cop arresting the dealer, the jailer removing the handcuffs from the dealer at the jail, the janitor at the jail, the bus driver who drives the janitor home to his wife who cooks at the restaurant, to the bartender and waitress working the tables and bar, ad nauseum, folks, you and I can't forget 2001 through 2005 everybody was talking Real Estate.
Full blown panic buyers of homes at the Market Top saw every other homebuyer purchasing homes with Interest Only loans which switch into an ARM in year 3 or 4. And this was all done with no documentation, so they thought, "This is the best way to amass my personal fortune. We're going to make so much money off a home, we'll buy his and her Harleys!"
During the Panic to Buy Housing, I sat back with disbelief every time someone urged me to buy a house and thought, "Didn't these fools see this cartoon end badly during the Internet Mania? Jesus, buy a house with No money down, Interest Only payments for the first 3 years, followed by an ARM reset in year four and interest rates are starting to go up again? Can't you folks work a simple Texas Instruments calculator? Do any of you understand no asset goes up forever?"
I was thinking these thoughts every day in private, and saying them out loud to people at work and my loved ones. Still, despite my warnings, several people I really care about bought overpriced housing in which they are now "upside down" on the mortgage. Being upside down on their mortgage simply means their home is now worth far less than what the mortgage was taken out for.
When you are upside down on your mortgage, you are no longer a homeowner, my friends. If you rent $500,000 from a lender to buy an overpriced home, and two years later your home appraises for $350,000, my friends, you are now a slave to your master: the Lender.
As an indentured slave in an upside down mortgage, your home now owns you. And your lender owns your home at usurous rates which are paid to them monthly, or else.
I don't know about you, but I can assure you renting $500,000 from your bank to buy a home which declines in price to $350,000 in the space of 18 months is surely not going to be thought of as one of your most brilliant "investment" moves when you are old and gray.
Warren Buffet warned in a February 2005 speech in London that the Credit and Housing Bubbles in America risked turning American homeowners into "sharecroppers". (His word exactly.)
But my favoirte expression about buying housing at the wrong time is this: I have two co-workers paying $4,000 interest only payments so as to have the right to say they "own" a home. Two nights ago, one of them, a dancer I love dearly, a young girl from Argentina who wants to make it in America, told me this: "Rocko, my condo is my pimp. I am working so much these days so as to pay that monster."
Her payment of $4,000 a month is for a condo which would fetch $200,000 less than her original buy price in the mid $500,000. And what makes this worse is not one single penny she has paid in these monthly $4,000 payments has gone toward paying down any principal!
Now That Housing is a Bust, What's the Next Asset "Investment" Opportunity?
People who ask that question are followers of short term trends. Yes, it is good to be aware of trends. But you want Long Term trends. And it's even better to find a "seat" early on a long term trend when it's just about to take off.
Unfortunately, the masses are usually the last to get on board of a good thing. And the reason for this is they allow mass media to spoonfeed their brains. Thinking on their own is too hard and time intensive. So, they end up buying the latest short term trend once its already whipped up into a Category 4 or 5 intensity. Instead of trying to catch their tails like a dervish cat, people would do well to study history and find that one asset class which delivers "opportunity" every day of every year.
There is only one place I can always find an Investment Opportunity every day of every year: the stock market.
Nothing in history has ever beat stocks as an investment. Nothing. And especially NOT housing.
Let's get something straight, folks:
A home is not an investment.
A home is something you live in.
Don't buy a house so as to flip it and make a profit. That's a sure road to unhappiness and financial hell.
When you buy a home, you better be damn sure it is a place you really, really want to live during the worst of times as well as the best of times.
If you go out and buy a speculative home to flip on that great faulty premise made by all Realtors, i.e., "They aren't making any more land in Key West (Richmond, Tampa, Los Angeles, San Diego, fill in the blank) and real estate always goes up" then you are a sheep ready to be fleeced. You bought the lie. You don't know history.
(If you want to read some interesting stories about Florida real estate, google the 1928 Florida Real Estate Crash. There are homes in Boca Raton, Palm Beach and Miami which have still not gotten back to their 1928 levels of market top pricing. By the way, EZ Credit for consumer goods such as radios and refrigerators, and ARM loans for houses were introduced in the 1920s run up in real estate and the stock market.)
If you are "investing" in Florida real estate today and you can't do simple math, you are going to have your head shoved into an Asplundh woodchipper by a backslapping Realtor and Mortgage Broker feeding your body into the machine.
I know only a very few people who do no work other than live off their real estate "investments". Sure, I know dozens of people who own rental properties but who cannot live of the meager $100 or $200 per unit they take in every month after expenses. Most of these low income earners of real estate plow their money back into safer investments such as TIPS, bonds, stocks.
On the other hand, I know quite a few people who live off their stock investments quite nicely while they live in a "home" they purchased with money they "rented" over 30 years.
I'll bet you right now there are thousands of folks in the Florida Keys who are living off dividends from stocks or pension funds which are built upon stocks which throw off dividends, rather than pensions built on Real Estate. (With the advent of REITs or Real Estate Investment Trusts, there are actually pensions buying "stock" which is based on real estate investments such as giant hospital leases, banks leases, commercial shopping centers, apartment buildings, etc. So yes, there is a way to get in on income money streams built on billions of assets, but you have to do your homework and buy the correct REIT stock. For instance, you do not want to buy an REIT which makes its money buying and trading sub-prime Mortgage Backed Securities.)
In Key West, Spottwood, Singh, Swift and a few other developer names are living off real estate. I predict some of these people will soon find they are in over their heads with all these condo hotel conversions. I know for a fact the guy who specializes in "affordable housing" is already sweating the fact hundreds of people on his "waiting list" no longer qualify for sub-prime loans. . . but that is another story to write about in the future.
When an Investment in Housing is Not an Investment
A home purchase requires thousands of dollars of interest payments over the life of a loan. Yes, if you lived in your house for 20 years and sold it at the market top in 2005 and got equity back, you most likely"made" money. However, once you subtract all the interest payments, the closing costs, the insurance costs, the taxes, the Realtor costs, and the big one, INFLATION, and so on from that equity, how much did you really "make"?
Many a homeowner sells his or her house after 20 years and they see they have $100,000 in "clear" equity. Yet, if they subtract the above costs from that $100,000, in many, many cases, the homeowner shows a net loss of real dollars which also have less buying power after 20 years of inflation.
As I pointed out in another post on this blog , I rent a million dollar home for $1,900 a month. This house will never sell in this current market at its new asking price of $1.2 million . . . which by the way is the new price after two reductions from $1.7 million asking price a year ago. Think about that. The asking price has dropped from $1.7 million to $1.2 million in about 18 months. That's a 29% drop in asking price.
(Late breaking news: my landlord just took my house off the market. Looks like I'll not have to move for many a long time. Great. I love this house.)
Back to my example.
This $1.2 million house . . . were I suddenly to lose my mind and purchase it at my landlord's current asking price of $1.2 million . . . would cost me a sizable $120,000 downpayment to get the best loan at a 6.5% rate.
But let's say, that eventhough I'm a good credit risk, the local bank is jittery about all its bad sub-prime loans and is very worried about the newly growing pool of Alt-A loans going bad. So, instead of 6.5%, I only get a fixed loan for 30 years at 7.0%.
Okay, so far I've put down $120,000 of hard saved money as a downpayment.
Let's subtract that $120,000 from $1,200,000 and we get $1,080,000 to finance. We are talking about a payment of $7,336.00 per month, give or take ten dollars.
Anyway, that's what I would have to be paying at a very good loan at 7% over 30 years . . .and that is AFTER putting down a huge downpayment of $120,000.
All right. Let's add other costs. Monthly insurance and taxes will add another $1,000 a month to that payment. But let's be conservative and give the Real Estate Cartel the benefit of the doubt and say our new payment with taxes, insurance, etc., added in are going to run at $7,900 a month.
To show you how conservative my additional costs for insurance and taxes are, let me give you another Key West lesson: my ex-roomate owns a home up on Key Haven, where a lot of rich people have homes. His home was flooded during Hurricane Katrina. He's had his home on the market since before Katrina, and has come down in price by $300,000 or more. Today, he'd take $600,000 for his home.
Now guess what his homeowner's, flood and wind insurance are running per year? Hold on to your seat: $20,000 per year!
His insurance payments alone are almost what I pay per year to rent a million dollar home.
Factor in his taxes and his monthly mortgage, and you can understand why this man wants to leave the Keys just as soon as he can offload this "investment" of his.
Doing the Math on My Rental of a $1.2 million Home vs. Buying It
Let's subtract my current rent from conservative "best case scenario" Mortgage payment from hell to buy this house ($7,900 - $1,900 = $6,000).
Okay, so right now I have $6,000 a month "free money" not tied up in the early months and years of a 30 year loan to buy this overpriced "home".
That's a boatload of money I am not spending on a mortgage every month, that $6,000, is it not?
I'm saving more than $6,000 monthly buy renting rather than buying this $1.2 million home I live in. (Keep in mind, this "home" was recently on the market for $1.7 million.)
Wait. Let's consider another fact about compounding interest when it works against you.
Let's think about the way mortgage payments are set up or amortized over 30 years.
For those of you not schooled in math or loan payments . . . the early parts of any loan are the years where you are paying more interest than you are paying "principal".
If you don't believe me, take out your car loan booklet and receipts and look over the payment schedule. Notice how the first payment goes almost all to paying "interest" while the last payment pays off almost all "principal"?
Compounding, when it works against you, is a real bitch brothers and sisters. When you buy more house than you can truly afford, you compound the pain of compounding interest. It will only get worse the older you get.
Let's also consider the "other costs" when we purchase my current rental home:
What's the Realtor's commission for representing your buy? That's 3 to 6 percent or $36,000 to $72,000 we pay out of pocket.
We also have the closing costs, the title insurance, etc.. Let's be conservative again with these "extraneous" costs.
Let's round these figures off for Realtor's commissions, closing costs, title insurance, etc., to $40,000 for simplicity sake and so that we don't get a bunch of crybabies from the Realtor Cartel telling us we are too high in our assessment.
All right.
Add that $40,000 to your $120,000 downpayment in 2007 to buy my $1.2 million home, and you have tied up $160,000 of your capital in the purchase of this overpriced "home".
That's a huge hunk of money, $160,000.
That huge hunk of money would have to be spent at the beginning of my fixed 30 year mortgage to insure I get that good low rate.
But let's keep in mind something else. I am assuming that this house . . . which has already dropped in price from $1.7 million to $1.4 million to $1.2 million will somehow stop at $1.2 million of appraisal and suddenly take off to the races again like the go-go years for Real Estate in Key West from 2001 through 2005?
I don't think so. In fact, I'll take on all bets that the decline will continue for many years to come.
In this declining market, I feel this home I am currently renting is not going to become a world class "investment" . . . as Realtors are so wont to call homes. . . for the next 20 years or more as the excess pricing insanity of the Housing Bubble will take years to bleed away. I'll even go so far as to say that this house may never meet the current asking price of $1.2 million during the remainder of my lifetime . . . and I hope to live another 50 years.
Next let's consider this too: Over the life of this loan, we will make 360 payments of $8,000. (I conservatively rounded up from $7,900 a month considering the inflating price of insurance and taxes in the future).
So, conservatively speaking, we will have paid over $2,880,000 in mortgage payments to be able to stand in this house 30 years later and burn the "mortgage payment book."
That's very close to $3 million in mortgage payments for a $1.2 million house which I feel is going to never sell for $1.2 million in the next 30 years.
Three million dollars!
That right there blows my mind.
I spent almost $3,000,000 of hard earned dough over 30 years to buy this house originally priced at $1,200,000 . . . and that's after I put down a huge hunk of 2007 dollars ($160,000, remember) as my downpayment, closing costs, Realtor fee, etc?
No sir, I ain't taking the bait that "There's never been a better time to buy Real Estate!"
Not this boy.
I didn't grow up to be fooled twice by sharpies who used my ignorance of investing to fool me back in 2000. Once is all it takes with me.
To make this example all the clearer:In 2007 we bought this place for $1,200,000. Thirty years from now we want to sell this house the day we pay it off.
For us to make any "real" money off our "investment", we must set an asking price of over $3,000,000, not just a sales price over and beyond $1.2 million.
Why do I say this?
If we bought a house for $1.2 million in 2007 and sold it later for say $1.5 million in 2037, I made a profit of $300,000 right?
Wrong.
Yes, we bought the house for $1,200,000. But in 2007 dollars we spent $160,000 up front (downpayment + closing costs + Realtor fees + etc) while scrimping and saving $8,000 a month to make a mortgage payment just so we have the right to call ourselves "homeowners".
Imagine having made 360 monthly payments of $8,000 during those 30 years of servitude to the bank, you sell your house for $1.5 million, then you and your partner slap each other on the back for being so smart and astute to "invest" in the house way back in 2007 so you could have a $300,000 nest egg when you sold it.
What's wrong with that picture?
Well, if you paid the bank over $3,000,000 in hard cash over 360 monthly payments, selling a house at a $300,000 profit is a solid losing bet. Yeah, you get your $1.2 million original price back. And you get $300,000 on top . . . but you've paid $3,000,000 to the bank meaning those beancounters are the real winner in this deal.So, let's quit being so negative and pessimistic here. Let's play this Real Estate deal where I buy the house today at $1.2 million and make a big profit in 2037 using the National Association of Real Estate's cheerful prognosis.
Let's say I sell the house for $3,000,000 in 2037.
Play along with me because I am going to show you how this is not even going to be a profitable "investment".
We're just saying this to show how the blind and hopeful still wouldn't make real money off this home in 2037 . . . even if someone were stupid enough to pay $3,000,000 for it in 2037
David Lereah, spinmeister/NAR economist would tell you in 2037 that I "made" $1,800,000 equity off my sale price of $3,000,000. In truth, he forgets I would be paying off a Realtor for helping me sell the place.
Okay, so we "make" $1,700,000 off our "investment". Now we are millionaires!!!
Let's back this train up, boys and girls.
Let's go back to the beginning of this example.
Let's take that $120,000 downpayment plus that extra $40,000 in Realtor fees, closing costs, title insurance, etc., which combined give us $160,000.
If I had $160,000 spare cash right now, I'd invest all of it in Big Cap blue chip stocks which are way undervalued at this time. I would not buy overvalued blue chip stocks. I would buy names like WalMart, Proctor and Gamble, and Johnson and Johnson and Chevron right here and now. I'd stay away from overvalued stuff like Apple, Cisco, Ford, GM, Domininion Homes, Toll Brothers, etc.
Here Is What Using $160,000 Wisely in the Stock Market Instead of Using It as a Downpayment on an Overpriced $1.2 Million Key West Home Will Get Me in 30 Years
Now I'll guarantee anybody reading this post that if we were to invest just that lump sum in 2007 and we got the average stock market return of 13% per annum (this includes dividends), at the end of 30 years, I would have $6,259,000.
If you don't have a calculator on your desk to figure out what that $160,000 compounded at 13% yearly would get you in 30 years, no sweat:
Here's an easy one you can use on the internet
(To use this calculator on the net, I use $160 as the staring principal as the calculator will not allow me to punch in 6 figures. Once I get my answer, I add three zeros. Simple. As you can see, $160 compounded @ 13% per annum for 30 years gives us $6,259. Add three zeros. Voila. Our answer is $6,259,000.)
Now subtract our starting sum of $160,000 from that figure. Let's round it off to a $6,000,000 gain just to keep this simple.
Now if you have stayed with me this far, congratulations.
Now answer me this:
Would you rather:
a) Pay down $160,000 for an overpriced Key West Home at $1.2 million today and add in 360 monthly payments of $8000 for 30 years and sell the home for $3,000,000 . . . meaning that all that money you paid the bank over the years simply kept even with inflation . . .
OR
b) You rented the house paying out about $750,000 in total rent over the next 30 years while investing all of what would have been your initital downpayment in the stock market which would give me a $6 million payoff in 2037?
Wait. There's one more question you have to think about too.
What about the $6,000 we save every month by making rental payments of only $1,900 versus making monthly mortgage payments of $8,000?Glad you asked, and we'll get to those savings in just a few minutes.
Unmasking the Unreal Profits You Thought You Would Make In Real Estate
Now in the home deal above, David Lereah, Lead Toad Economist for the NAR, is going to tell everyone you made $1, 800, 000 profit of your "investment" in a home. (You bought for $1.2 million, and 30 years later you sold for $3.0 million.)
However, what Lereah is never going to mention is you also paid $8,000 a month in mortgage payments every month for 30 years, or 360 months, which gave us that figure of $2,880,000 in monthly payments over the course of the loan.
And don't forget those escalating property taxes and insurance. So we rounded up the total montly payments to $3,000,000 paid out over the life of your 30 year loan.
Wait, we also have to add that $160,000 (in 2007 dollars) to that figure.
So, in reality, I the homeowner who "gets back" $1,700,000 profit (or $3,000,000 equity) for the sale of my house in 2037 am really getting back dollars which have been eaten away by inflation while the bank got rich "renting" me $1,200,000 in money. Furthermore, this $1,200,000 which I "rented" from the bank lost value for 30 years to inflation. To make this all the more graphic, the bank made money by playing the "spread" between the money I paid them at their interest rates and inflation. The bank then takes this profit from the spread and invests the money I pay them back with interest . . . in other money making loans.
Hence, the only winner in buying this house at $1.2 million in 2007 and selling it for $3.o million in 2037 is the bank or lender. They made money all along. The money I paid monthly is destroyed by inflation. The $3 million I get back is simply the same $1.2 million I paid the bank at interest and which did not keep up with normal inflation.
How Banks and Lenders Make Money Off Compounding by Investing in Things Other Than Loans
Banks make more sensible "investments" such as in stocks, bonds, and commodities to help them work around the loans they made and which are going bad.
(Never mind that bank "reserves" are the lowest in history and that banks are now investing in deriviatives, MSOs, CDOs, and other extremely risky bets to amp up their returns. As they lose more money on sub-prime loans, banks are taking on inordinate amounts of high risk to make up for their growing losses. Derivatives, with margins of 10 to 1, are the ticking time bomb in bank vaults waiting to take out some major players if corrections are not taken soon.)
But to be sure, if you read annual reports or you simply breeze through "Institutional Holders" of great Blue Chip Big Cap stocks, you will see many a major bank is holding billions of shares of stocks in companies which have been around forever. If the banks are making money in the stock market and making money off your ignorance, what stops you from being a loser, smarting yourself up, and joining the Big Boys on the Right Side of the Winning Bet?
Let's Show You How I the Renter Will Use That $6000 Monthly Savings from Renting vs. Buying This Home . . .
Let's get back to me the renter:
Instead of buying this exremely overpriced house, I took what would have been my $160,000 startup/downpayment "nut" and put it in the stock market.
Again, if I invested in "safe" Big Cap stocks which average (with dividend re-investments) 13% over 30 years, I would have $6,259,000 to show for my efforts.
But wait. Let's make this more interesting.
I continue to rent this house for all 30 years.
(Again, look over my recent blog using the New York Times new "Rent vs. Buy?" Calculator which told me renting for all 30 years would be better than ever buying at $1.4 million, which by the way was the price on this house when I wrote that blog.)
During this time of renting for 30 years, I also save $6,000 monthly by renting versus buying, right? (My rent is $1,900. I pay no taxes, no insurance. And, being an observer of Key West Real Estate, I see rents coming down all over this island, NOT going up. There are too many vacant houses all over the place needing someone, anyone, to pay rent to help the owner pay off debt, right?)
Okay. Now just for kicks, lets say I add just $3,000 a month to the stock market, and the other $3,000 in savings, Linda and I use for discretionary spending such as better food, dining, vacations, a new big screen TV, whatever. Some of this money would go into "rainy day" savings accounts such as Everbanks different CDs etc.
Okay, so instead of investing all $6,000 a month of "savings" in the stock market, we instead invest only $3,000 in the stock market.
Starting with $160,000 in 2007 and adding $3,000 a month for the next 360 months to the stock market with 13% returns, this is what we would have in 30 years: $18,186,000.Now let's stop right there. That's $18,186,000 we would have in 2037 AND we also had fun spending and saving the other $3000 in savings from renting on stuff like vacations, rainy day funds, buying a used car or boat with cash, etc.
So, who would you rather be: the guy who bought this house in 2007 for $1.2 million and had to scrape and work his ass off for 30 years to make those high monthly mortgage payments of $8,000. . .
OR
. . . Would you rather be the guy who spent only $1,900 a month on rent for a million dollar house, who never paid dime one towards maintenance, taxes or insurance, and who pocketed what would have been a downpayment plus costs of $160,000. Furthermore, he lived life during those 30 years of renting by taking $3,000 of that monthly $6,000 in savings from renting vs. buying. And to top this all of, he took the other $3,000 of the $6,000 savings from renting vs. buying and invested it in safe stocks which have increased dividends for over 50 years running. And then to end this story, he has $18,186,000 but the poor man never was a homeowner?
Which guy do you want to be?
The dope who bought real estate close to the Market Top for Real Estate and who wasted 30 years of his life working himself silly to "stay even with the Joneses", or the smart guy who lived life, moved around from neat rental to neat rental, and who retired with $18,186,000 after vacationing all over the planet for years and finally finding a farm he wanted to buy for $3,000,000 cash.
I think you know which guy I identify with.
So the Stock Market Average is 13% (with Dividends Re-Invested) Per Year Gain . . . Can You Beat Those Gains If You Really Learn How to Invest in the Stock Market?
I have beat the market averages for the past five years, with the past three years being my "best" years of stock market investing ever. This year 2007 is looking to be my best ever.
It took me 11 years of perserverance to get here, but I am here.
I'm making damn good money in the stock market, I don't sell my stocks, and I am reinvesting dividends in those Big Cap companies which I hold.
Now I ask you, who is smarter, David Lereah telling me to go ahead and buy a home right now, or, my inner voice telling me to wait out the real estate crash and buy a cheaper home years from now while living in a millionaire's house for less than 1/4 of what a monthly mortgage payment would cost?
Who do I listen to, David Lareah who would "put me into a house" which ties up my capital in the early years while it slowly pays off interest, or my inner voice telling me, "Hey Rock, we got three excellent Big Caps with dividends looking good for a buy right now, Proctor and Gamble, Johnson and Johnson, and Chevron."
I saw through the Realtors in 2005 barking like maddogs because I got burned in the stock market of 2000. I knew buyers of Key West homes in 2005 were cruising for bruising.
I know what mania looks like firsthand. I was part of the Internet Bubble. Had I bought tried and true stocks like Phillip Morris, WalMart, Coca Cola, Pepsi, or any other of hundreds of solid "name" stocks which were neglected in the 90s, I would be a millionaire today.
The stupidest and costliest mistake of my investing career was due to me listening to so called "experts" on the stock market. I let my greed glands get the best of me, for sure, but every damn day some new "expert" came on CNBC to tell us all "It's different this time. Welcome to the New Economy. The Paradigm has shifted..."
(I will address some of those "experts" in a future post. Boy, I've got a lot of future post ideas from writing this one.)
Needless to say, there were sage advisers I neglected in the late 1990s, such as Warren Buffet, the nascent Motley Fool writers, the men such as Jim Rogers, Alex Van den Berg, and so on, who were watching us manic buyers of Amazon, Yahoo, Oracle, Sirius, dig our own portfolio graves while they kept trying to warn us, "You'll be sorry."
Fool me once, shame on you. Fool me twice, shame on me. (Don't ask George W. Bush how this saying goes, please.)
So, I may continue to be a renter for the rest of my life. Which would mean, I might die without having ever owned a home. So what? If Real Estate stays insanely price, I can outwait this insane market longer than I live.
Yes, I'd love to own a house. But no, I don't want to be owned by a home which I cannot afford.
If it makes more sense to rent and focus on making way more money in the stock market, so be it. I can't see buying an overpriced home (in my mind this home would have to come down to $400,000 to get me interested, and I'd buy at $300,000 to $350,000) today just so I can feel good about myself now being a "homeowner".
I don't want to buy today, feel good for a month, and then when that first mortgage payment hits, I too feel like my home is "my pimp."
I can buy a home I don't really want to live in right now on Stock Island. I could buy any number of "condos" which give me no privacy and which aren't pet friendly and where the freaking condo association will tell me not to fly an American flag or I can't keep firearms or I cannot play my music over certain decibels (not that I do any of that now, I just don't like nosy authority telling me how to live).
There's not a damn $350,000 home anywhere in Key West which suits my wants and needs, today. And $350,000 is all I can afford. Yet I live better by renting a millionaire's house for only $1,900. And I have a new goal to invest $1,000 every week in the stock market.
So, why buy real estate if I'm not going to be relaxed and happy? Why take on a massive loan to buy a home which is way overpriced? Why not wait out this buyer's market as more inventory floods the market, prices continues to have pressure downward, while my money continues to grow by 20 to 30% or more (my returns in the stock market the past 3 years, honest) and I continue to educate myself in the proper way to play the stock marke?
I'm through with losing money.
I am in the math business.
Just remember, the statistics below are for whole indices (plural of index) which include losing stocks of same market caps.
The idea is to buy the "winners" at the .40 cents on the dollar. It's called "Value" investing and I will take this type investing up later on this blog and give you several real life cases of safe stocks I've bought years ago, where they are now, and how easy it was to spot these money machines.
Let me leave you with one more thought.
When you buy stock, you become an "owner" of a company. Shareholder means you share the ownership of a company.
Warren Buffet and I are Pimp Daddies of Budweiser. . .
When I think of my holdings in Coca Cola or Budweiser, I smile and think, "Warren Buffet is my partner in this company." Warren Buffet is the kind of investment friend I like having on my side of a bet.
When I decided to buy Budweiser, it was at Bud's worst low for the past 10 years. I saw Bud sales . . . and all beer sales for that matter . . . pick up market share from liquor in my bar starting in late 2005 . . . the same year the Housing Bubble topped.
I've seen three "Beer/Liquor" Recessions since I've been in the bar business since the late 1970s. I know what the market share change looks like. When beer sales decline, look to buy a good wine/spirits company as they are stealing market share back from beer. And vice versa.
I convinced one of my owners of my nightclub to buy a slew of Budweiser at $41 to $42 a share. This man is very wealthy from playing the stock market since the 1960s. When I presented my thesis to him (it was a verbal 10 minute thesis, nothing on paper) he turned around the next day, called his broker, and bough BUD up the wazoo.
I think what convinced him out of the 9 or 10 points in my presentation was Warren Buffet had bought $2 billion worth of Bud at higher prices, somewhere in the $48 range. So, in essence, we were buying BUD cheaper than the greatest stockpicker the world has ever seen.
Anytime I can buy a pick of Warren Buffet's for less than what he originally paid for it, I'm putting down the money hand over fist. In a later blog, I will tell you of a free website which gives me monthly updates on what Buffet is buying, how many shares he bought, and whether he's lightening up or adding to his positions of a certain stock.
So, when I told my boss about Buffet buying BUD at $48, and he and I realized beer was making a comeback in our bar, plus my Japanese Candlestick charts were screaming "Strong Buy", plus we were buying BUD for $6 or $7 less than what Buffet was paying for it, we both jumped in.
Today, a little over a year later, my boss and I are sitting on gains of about 25 to 28% on our BUD shares. The dividend has recently increased to .295 cents a share quarterly, or $1.18 yearly. Both my boss and I re-invest those dividends which in turn buy more BUD shares every quarter. Which in turn means more total shares will pay out even more dividends, which means more buying power to buy back even more shares. We've got this money making machine called "stock" in Budweiser. Every month, the Bud story gets better and better. Can you imagine sitting on these shares for 30 years or 120 quarters of dividend re-investing? Wow.You see, I use compounding to my advantage. I do not allow compounding from usorous loans for overpriced assets to work against me.
I don't piss away my hard earned money buying an overpriced house and paying a bank interest. I make money by having the company(ies) I own pay me interest with quarterly dividends which are paid out from the "profits" they make and give back to us shareowners.
See, I am Budweiser's Pimp Daddy.
I work in a bar where Bud Light is our No. 1 seller. Corona is our second best seller.
Bud owns 50% of Corona and 100% distribution rights of Corona in the US.
Bud just bought Rolling Rock.
Bud owns distribution rights for Grolsch and Tiger Beers in the US, the No. 2 beer in Holland and the No. 1 beer in Cambodia.
Bud owns the No. 4 Beer in China, Harbins, and owns 100% distribution of it in China.
Bud owns 27% of the No. 1 Beer in China, Tsingtao. And here's another factoid: China has a younger average age for population than the developed West. Hence, beer sales are exploding in China. I should mention also, Bud is entering India by purchasing some of their top breweries. Beer is not a big seller in India, but Bud is already amping up fun advertising which has younger Indians trading wine and other spirits for beer.
One last item: over 44 million Latinos live in the USA now. Their number one and two beers are Bud Light and Corona in that order.
And I did not even discuss how Bud runs the largest aluminum recycling business in the world or how they have hit upon new packaging which has turned the business upside down and causing them to run their packaging plants 24/7 with more plants on the drawing board.
See all that knowledge I just tossed at you? It came at a price. Instead of sitting in front of Must See TV 5 nights a week, I simply "did my homework" on the internet.
I am a shareowner in Bud. I let Warren Buffet do all the Fundamental Analysis and talk about Bud at his annual meeting. I read his annual reports on the internet. He likes what he sees. I like reading that.I like what I'm seeing in my bar. I joke about drinking more Bud with my customers.
Yes, you are damned right, I am Budweiser's pimp daddy. Everytime someone finishes off another Bud product in my bar or the barback walks through with 3 cases of Bud Light . . . for the fifth or sixth time in the night . . . to restock a cooler, you bet I smile.
This is how I make real easy money in the stock market: I buy what I know or can learn to understand. I learn the history of the company. I look for solid management. I look for smarter investors in me to be investing in the company already. And when my charts say "Strong Buy", I buy.It's taken me years to figure out how to really make money through investing.
Again, some people are real estate flipping whizzes, but its usually those who have done a load of homework on their own and realized when to read a market in real estate bottoming or topping.
You don't get rich buying a house for $1,700,000 (the price on this house I'm in back in 2006) and then seeing the same house sell for $1,200,000 one year later.
I don't care who you are, if you were to have bought this house at $1,700,000 in 2006, you would be feeling like a chump today.
The same can be said for those of you bought Amazon, JDS Uniphase, Qualcomm, Enron, etc., etc., back in the go-go days of the the late 1990s when everyone was going to become an overnight millionaire.
When Informercials were running by the hour telling you how to become rich with no money down buying real estate, where the hell was your mind if you lost money in the Internet Bubble? Did you not have a red flag run up the flagpole on top of your brain which said "Warning: This reminds me of the mania in the stock market?"
Thus, while everyone I know was losing their minds buying Key West Real Estate over the past 5 years, I was busy teaching myself how to properly invest in the stock market. You buy Longterm, you Hold, you re-invest dividends over and over, and you continue doing Homework on your investments.
Coca Cola is not going out of business any time soon. Nor is Budweiser. Colgate? They, like Coca Cola, are over 100 years old. All three of these examples, I "own". And the dividends increase yearly. And since I've bought these three, all three have gained in price per share.
These 3 "tried and true" companies grow slowly buy surely, year after year after year.
No, none of the above three stocks are throwing off the 1300% gains of that risky Calpine bet I told you about, or the less risky, but still risky, Akamai bet which has not gone up over 400% in less than two years of holding.
Yet all three stocks are still beating the S&P 500 averags over their time I've held them. And as I stated before, the average for S&P 500 stocks to yield yearly is 13%. And I plan to beat that average forever by purchasing extremely undervalued classic Big Cap Companies as I am doing now.
I sleep well at night because I am very diversified in my holdings. Yet there are plenty of Americans with zero savings, tons of debt, and they are living in a home which they can no longer use as an ATM machine because the value of their home has fallen in value below where they originally bought it.
And think about all those added on costs of buying a home which people wanted to "invest in" not "live in".
When I buy or sell a stock, I don't pay 6% fees. I don't have title costs, I don't have insurance to pay, or yearly taxes. Yes, I do pay a low 15% capital gains tax on dividends paid out, however, I also have a Roth IRA where no taxes are paid on dividends and where no taxes will ever be paid on any and all money pulled out from it during my retirement.If I need to unload a stock which all of a sudden has changed from a great story to one that is truly bad (like a CEO is caught buggering little boys at Boy Scout Camp), I can load up the stock symbol with my attendant shares I own and hit "SELL". It would take me less than a minute to go "liquid".
However, that kind of made up story about a CEO buggering boys would spell "Buy Opp" to me instead of "SELL". As long as the company was still a great company and the managment down the ladder was still pristine and intact, I would most likely "average down" on my intital buy and ride the stock back up.
So, what I'm doing today is just throwing out a few thoughts which I've thought long and hard about over the past 7 years.
I am hoping my mindset and the way I think about things will help you avoid the mistakes I've made in my investing career.
Again, yes, there are people making money in real estate. But you would take years of your life to become Sam Zell - the famous billionaire who has made his billions off real estate. (By the way, Sam just sold billions of real estate he owned to a private equity firm. If Zell sells, you can bet your ass he sees harder times coming in Real Estate.)
To dabble in buying a home without really studying the pros and cons is financial suicide in my mind.
You can't take the biggest purchase of your life and simply turn it all over to people who make money off your purchase, i.e., those with a vested interest in seeing the pyramid scheme continue such as mortgage brokers, Realtors, appraisers, homebuilders, title companies.
You Should Never Place 100% Trust in Strangers Who Only See You as Their Next Commission.
You've got to come at this with your eyes wide open and your head filled with knowledge.
If you buy a house, brother and sister, you will be chained to it for a long long time in a declining market which we are witnessing now.
If you wake up tomorrow and want to sell the house you just bought yesterday, you can't simply open up an internet site, load up "SELL", click a button, and suddenly see cash money flood into your account.
Sales of homes take weeks and months to list, show and close.
A stock, on the other hand, can be bought and sold in less than a minute. Hell, daytraders buy and sell the same stock hundreds of times in a day.
And what about the tinier fees for buying and selling stock? I can buy $160,000 of say Proctor and Gamble this morning and the fee for the purchase will be $9.99 via my internet account. If I hold a stock for 20 years, I will never pay insurance fees. I will never be taxed on appraised value, but only on any dividends paid. (I will pay capital gains taxes if I sell that stock 20 years down the line.) And if the stock is a dividend payer in a Roth IRA or other tax free retirement account, I won't even have to pay dividend taxes or taxes on any stock I sell once I reach retirement age.
If I bought a $160,000 flooded trailer home, I'd still have to pay a Realtor her cut, I'd still pay title fee, closing costs, taxes, insurance etc. I'd be paying taxes and insurance fees on that home every year too. Plus, a flooded home is going to need to be fixed up and maintained. Where's the sense in buying a "cheap" home simply because it's cheap?
That's what is bothering me about so many of the latest pitches from Key West Flying Monkeys (Realtors): they keep telling you how "affordable" housing is getting. Yeah, affordable if you want to live in a place you aren't really going to like living in.
I mean, come on. I can go root around the back of Sears and get an giant washing machine box to go live in. I can place it in the magroves. I won't have power unless I take my generator out there. I can "afford" all this, but do I want to pay for the "free" living quarters by all the hassles it would involve, not least of which would be the slow loss of my sanity?
The Big Question You Have to Ask Yourself Before Even Thinking About Buying the Key West Realtor Bullshit
So the question a smart investor must ask himself and loved ones today is this: What is the smarter choice here in a declining market for housing? Housing or stocks?
Is housing still overpriced in Key West? Yes, yes, yes. By a long shot.
In decades past, the old investment wisdom was "never buy a home which would cost you more than 1/4 of your monthly take home pay.
That's still outstanding advice.
Yet how many newly impoverished homeowners all across America and in the Florida Keys are putting 50%, 60%, even 75% and more of their paychecks towards housing?
Don't ask Regina Corcoran, No. 1 Cheerleader for Key West Real Estate who advised people in February 2006 to use their credit cards to finance a downpayment. If you listened to that woman, your Feb. 2006 "investment" is already smelling like Chum Spirit.
In Chicago alone for March 2007, there were more than 54,000 "homeowners" who were more than two months late on their mortgages. And that's just one American metro area. You think any of these 54,000 were paying less than 25% of their take home pay toward their mortgages . . . when they were paying on them?
Where are the net savers in America?
We as a nation are negative savers in 2007. This means we owe more to debt service than we save in our bank accounts.
Yeah, you might have $1,000 saved in your First State Bank account for a "rainy day fund", but you might also be carrying $30,000 in student loans, another $15,000 in credit card loans, and $14,000 more on a brand new Camaro which is in its third year of seven years of payments. So, are you classifying the above example of a "saver" as a real saver? Not in my book. Show me the net money in this example. There is not net gain. There is only a net debt/loss. Now multiply that debt owed by tens of millions of strapped Americans.
The real savers are overseas. They are in Asia. They are buying gold. They are buying stock. They are investing real capital in startup businesses which are taking high paying jobs away from Americans who must step down a pay scale to stay in a field in which the graduated college.
Not every American can be a Realtor or Mortgage Broker. And with the way Housing is going now, those two fields are seeing mass layoffs with smaller commissions for those toughing it out.
There's money to be made overseas in this new Global Economy.
Look at the world. There are 3 billion new capitalists unleashed in China, India and the emerging Asian countries. These capitalists are buying toothpaste, beer, electricity, clothes, chewing gum, and other "luxuries" which we think of as non-luxuries in the USA.Companies with American names are now making more money overseas than they are in America where they first sold their goods and services.
Take GM. Once it was the proud standard bearer for all American companies. It was once said, "What is Good for GM, is Good for America."
GM is billions of dollars in the hole. Their pension fund is grossly underfunded. GM keeps selling off bits and pieces of its company, such as Hughes Satellite, Delphi, and now their sub-prime banking arm. They no longer make profits on any car they sell in America. They make profits off their "lending" to buy the car. Still, the red ink is forcing GM to layoff American workers through buyouts and renegotiations of their once liberal pension and benefits packages.
Yet there is one glimmer of hope for GM: Asia. GM is making profits off every car it sells in China. And sales are up triple digits year over year in Asia.
So, do we buy GM here? Well, I don't know. I don't have a handle on the car business like I do in the bar business (Budweiser and Pepsi are used every night in my bar), toothpaste and soap use at home (Colgate and Proctor and Gamble are on many of the "names" I use every day), electricity (I own part of the biggest electrical utility in China which is also a play on the newest nuclear reactors about to take center stage during the 2008 Olympics).
I can leave GM alone to people with more knowledge about the car business, or I can spend a helluva lot of time reading GMs annuals and reading internet sources to see where their car business might be going. But for now, I'd only buy Toyota if I bought a car business. Toyota is the No.1 Car Company in the World as of last week. I'd say Toyota is doing something right. In fact, I know they are doing something correctly: I own a Camry since 98 and its hands down the most solid car I've ever owned.
Great investing is personal. It requires work. You can't leave this stuff to people who will seperate you from your hard earned money. It's why the old saying goes, "I gave my money to my broker, but the only person broker is me."
You had hundreds of so called "cheerleaders" for the internet stocks who went on TV every day to tell you such horseshit as, "Qualcomm is worth $1,000 a share," and who never used sold financial analysis to come to such a bullshit conclusion. Hey, that analysts who said that made millions in commissions pulling in stupid investors to pony up hundreds of dollars a share for Qualcomm.
Most of the beserk analysts on CNBC made money for their "investment" bankers by being their cheerleaders for worthless IPOs of companies which had no products, no services, but a really cool internet homepage.
The investment bankers made billions by bringing all these worthless companies public. Bringing them public meant you, me, and Joe Sixpack could buy "Globalstar" stock at a highly inflated price while the investment bankers and their friends were unloading their shares (in the forms of options and privately "gifted" shares) the day they were pumping the shares to you and me.
(This is called a "Pump and Dump" in stock brokerage houses.)
This same scam is going on in housing right now. Realtors want you to you to believe that housing only goes up in price, never down. Yet just the other day, the NAR's David Lereah finally had to "give" and cry uncle. He's looking for a "soft" retreat in median housing prices. He says median prices, nationwide, will drop by about .7% this year, or a tad less than 1%. And of course, he's using the median home price stat which is the most biased and corrupt way to judge true housing values. (But we'll cover the median price in another post.)
So, as the stock market has its corruptible greedhounds giving off bogus analysis and badly mangled "statistics", so to, the housing market has its vested interests bullshitting the sheeple on housing is a sure fire "investment".
As I said earlier, housing is not an investment.
Housing is only a place you can live and hope your purchase will stay just even with inflation as housing has done in the USA for over 100 years.
Stocks beat inflation on average. Housing rarely does.
A very small percentage of the populace ever lucks out and times the sale of a property at or near a market top for Real Estate. Just remember, there are always two sides to a sale. While others were lucky to sell their homes in 2005, those who purchased the homes from the lucky sellers are what Mafia loan sharks would call "the bagholders".Most homeowners who sell a home and collect the "equity" never look at the "costs" they paid the bank over the years to accrue that equity. They don't think about inflation (inflation and housing prices have run neck and neck over the past 100 years in America, meaning the normal price increase of any home averaged out is 3 to 4% a year...and I can show you how inflation is really higher than what the government is telling us it is, but that is yet another story to tell here on this blog.)
Billionaire Warren Buffet never "moved up" from one house to another. He still lives in his Omaha, Nebraska home which he bought for $38,000 or so way back in the 50s or 60s. Buffet realized early a "home" is something to live in, not trade like a stock.
I've shown you how a homeowner buying the place I rent would lose major investment equity by buying today while housing prices keep coming down.
I've shown you how the average stock has engineered over 13% returns (including dividend re-investment) for the past 100 years of precise record keeping. Keep in mind this average (13% including dividends) includes the 1929 stock market crash and the Great Depression.
Yes, there are plenty of companies which not only survived the Great Depression. There are some which thrived during the Great Depresssion.
It doesn't take a load of brainwork to figure people will put eating, drinking, showering, heating, air-conditioning, and other life necessities ahead of subscriptions to the highest tier of Satellite TV, expensive magazines which are only for show on the cofffee table, the best gym, etc. When people cut costs to save money, non-necessities are the first to go.
You got to have water to survive. That's been true since we evolved into modern humans. Anyone here think water companies will go out of business any time soon?
How about your electricity? Anyone here see modern homeowners saying, "Screw the electricity. I'd rather buy a new set of gold clubs and live in a sweat box with no microwave, computer, TV, radio, or other electrical appliance. So, how hard would the connection be and the sense to be found in investing in Electric utilities?
People make life choices when Hard Times hit. During the Great Depression, coffee never went out of favor. Prohibition was overruled in the 1930s during the Great Depression and the great Beer Companies and Liquor companies thrived again.
In Closing: There is a lot of money to be made in ALL markets when purchasing stocks.
We live in a Global Economy.
China is going to be the country with the highest GNP and GDP in my lifetime.
Many overseas companies are buying up American companies. Nestles, a Swiss company, just bought the biggest baby food company in the world, Gerbers, formally an American company. How do we profit off a Swiss company buying up another piece of America? We (you and me) buy the Swiss company and vote our shares.
I know this has been a scattershot post. I know it has traveled all over the map. And were I not so busy, I'd take days to edit this, hone it, and then release this for publishing on my blog.
However, I think it is best to sometimes to wade in here and start typing as I would talk to you on a barstool or sitting in a cafe.
My favorite insights to Warren Buffet are those eloquent moments where he takes questions from his shareholders of Berkshire Hathaway stock (Berkshire's stock is now $109,550 per share . . . the highest share price of any stock in history) and answers those questions with his folksy humor and precise language sewn with example after example of real life learning.
Buffet admits his mistakes in public. He puts his trades out there so that we can all hold him accountable. He hides nothing. Buffet cuts his losses quickly. And he lets his winners ride forever. He once said, "You want to buy a great company at .40 cents on the dollar while others are running for the exits." I learned from Buffet how to properly invest while others are losing their heads.
Enough said for now.
Here are the stock incices for the past 7 years and four months. Keep in mind these stats are not telling "the whole story". There are plenty of great companies, big blue chips paying dividends, in the S&P 500 which out-performed the averages for the Russell Small Caps.
For instance, were you to take certain oil companies such as Exxon, Chevron, BP and Conoco Philips, they've had their ups and downs since 2000 (mostly ups) and if you add in their dividend re-investments, you'd be waaaaaaaaaaaay ahead of the S&P 500 percentage for the past 7 years and four months.
Again, you can beat the stock market averages by buying "smart".
Smart money doesn't chase a stock when it is overvalued.
Smart money doesn't chase housing when it is overvalued either.
When you buy something, you have to do your homework. You got to know how the "game" is rigged against the small investor, be it the stock market or housing.
Thus, read these results with a grain of salt. The S&P 500 is further broken down into the ten sectors which Dr. Jeremy Siegel talks about in his book "The Future for Investors".
Keep in mind at all times the three sectors which he says beat the whole market from 1957 to the present: energy, healthcare and consumer staples. Also, I would add that Dr. Siegel should add an addendum discussing older "tech" stocks which are now "consumer staples" such as Microsoft, Akamai, etc. Eventhough we don't see "it" as we use it, I use Microsoft and Akamai evertime I fire up my computer.
I say without question this book is going to be a "classic" for years to come. This is one which will be taught in college classrooms to educate the rich kids how to get richer.
Buy this book today. Sit down. Read a chapter a day. Take notes. And learn how to make money in stocks while you sleep.
As John Hiatt sings, "It'll Come to Ya". Everything that Doctor Siegel is telling you has already been validated in my own investment career in spades. Had this book been published in 1999 . . . instead of last year . . . I'd never have bought an internet stock and I would probably sitting on my first million right now.
The book is that important and that good.
Buy it.
As of April 17th, the total returns since December 31, 1999
S&P 600 Small-Cap Value............129.84%
S&P 600 Small-Cap......................115.01%
S&P 400 Mid-Cap Value...............109.02%
S&P 600 Small-Cap Growth..........98.15%
S&P 400 Mid-Cap...........................97.07%
S&P 400 Mid-Cap Growth..............84.92%
Dow Utilities...................................82.35%
Dow Transports..............................70.70%
Morgan Stanley Cyclical.................68.33%
Russell 2000...................................64.23%
Morgan Stanley Consumer.............36.02%
S&P 500 Value...............................29.95%
Dow.................................................11.10% (29.03% w/divs)
Russell 3000....................................8.19%
Wilshire 5000..................................7.95% (20.49% w/divs)
Russell 1000....................................4.60%
S&P 500...........................................0.15%
S&P 100........................................-15.04%
S&P 500 Growth...........................-23.75%
Nasdaq...........................................-38.15%
Nasdaq 100...................................-50.51%
Here's how the 10 S&P 500 Industry Sectors have fared:
Energy............................................128.23%Financials.........................................52.87%Materials..........................................50.94%Utilities............................................46.96%Staples............................................34.99%Healthcare.......................................27.57%Industrials.......................................20.99%Discretionary.....................................3.97%
Telecom..........................................-48.75%
Tech...............................................-54.70%
p.s. I again want to thank Hamlets Mill a poster on Motley Fool for bringing that list to my notice.
And please note that all sectors values above do NOT show dividend re-investing.
Dr. Siegel makes the point that S&P 500 stocks have returned 11% a year with dividends. What he does not discuss is the S&P 100 stocks which are undervalued return more than 13% a year when you buy them cheap. If you continue to read this blog, I promise to deliver these promising stocks to you on a platter in the coming years. All you have to do is read over my Fundamental Analysis, look at my chart, buy, hold, forget the stock except for quarterly of yearly updates. Let the dividends re-invest over and over.
Lastly, HamletsMill added these last notes to his post:
The cost of living, as officially measured, has increased by about 22% since December 31, 1999. So, in terms of actual worth, one should discount accordingly.Still, the indexes do paint a clear picture of what has been the best working parts of the equities market this decade so far: Small-Cap and "value" stocks, and Energy.(From Eddy Elfenbein's "Crossing Wall Street")
