Posted on 09/27/2007 1:50:07 PM PDT by 2banana
1. Don't Be a 'Marginal Moron'
I have a theory I call The Marginal Moron Rule, meaning: Whenever a market reaches peak levels of speculation, the last entrants into that market lack the necessary knowledge or sophistication to properly navigate their newly chosen field. As my old boss Joe at Merrill Lynch would say, "These are the guys who take the last nickel off the table."
During the height of the technology and Internet boom, there were schoolteachers, doctors, attorneys, housewives and police officers who left their daily roles to take up daytrading. Their fundamental knowledge of investing was practically nil. Some of them took up technical trading by taking courses.
However, ultimately, most of them found out the hard way that they were at the end of a speculative bubble, and their money management days quickly ended. (That is not to say that some of these people did not succeed, because some did, such as RealMoney.com's James "Rev Shark" De Porre.)
After the tech/Net bubble burst, we saw the marginal morons flock to the next investment flavor of the month, real estate -- just when the housing market reached its heights. Again, untrained individuals quit their day jobs and entered a sophisticated market. Many took courses or read books on subjects along the lines of "how to make millions in real estate with no money down."
My wife, a real estate attorney with more than 20 years of experience, would have to face off or work with self-proclaimed real estate attorneys who had little or no real estate law experience or brokers who were clueless as to the ways in which the market operated in the real world. Now they are all out of real estate (and several are unemployed). The lesson: Don't enter a market where the marginal morons are fighting over the "last nickel."
2. If You Can Afford Beer, Then Stick to Beer
My Aunt Bernice has an expression about people who buy things that they cannot afford. She describes them as having "champagne taste with a beer pocketbook."
As a matter of public policy, we should ensure that everyone has affordable housing, but that does not entitle each citizen to own their own home. Yet, throughout the last several years the housing system was bastardized to make home ownership affordable to everyone who could not afford true home ownership.
Besides the complexities of dealing with adjustable rate mortgages (ARMs), "no doc" and "no money down" loans, home ownership has many more costs and variables, such as insurance, taxes and maintenance.
My wife and I put down 40% on our first house. While I am not saying that everyone should do that, it makes much more sense than putting yourself at risk by buying a house that you simply cannot afford. Buy what you can afford without having to resort to financial gimmickry (see "Understanding Leverage").
3. Cable Programming Is Not the Same as a Proper Education or Apprenticeship
CNBC brought us play-by-play coverage of the tech/Net bubble and daytrading phenomenon. In recent years, courtesy of the ever-expanding cable television landscape, the likes of HGTV and TLC popularized shows such as Designed to Sell, House Hunters and Flip That House, and as a result, a whole new generation of couch potatoes got into real estate (see the Marginal Moron Rule).
With these shows, what starts off as informative or entertaining programming slowly morphs into a collective conscious of speculation. The lesson: Don't mistake or substitute cable programming for a rigorous education or apprenticeship in a particular investment field.
4. If You Build It, They Might Not Come
Real metropolitan centers are built up around centers of industry, government, commerce and finance. Real estate prices always hold up better where there are jobs to be found. Yet, the last 10 years saw a buildup of excess housing inventory in places like Arizona, Michigan, Ohio, Florida and Southern California. Field of Dreams is not a documentary. "They" will not come unless you have jobs for them.
With the exception of Michigan and Ohio, there seemed to be a widespread belief that an endless supply of retirees were seeking to evacuate Northern climates for year-round golf and pay up for the privilege. And the automobile and other heavy-industries are in decline, so could someone tell me why so many houses were built in Michigan and Ohio?
If you plan to get involved in real estate development, please check the local economy and job market.
5. A Fixed-Income Investment Is Not Risk-Free
Maybe it's the legacy of the tech/net bubble or maybe it's investor ignorance or both, but it seems that if something has an interest rate attached to it, investors believe that it has little or no risk, and less risk than stocks. That could not be further from the truth. There were plenty of toxic "pieces of paper" which were packaged and sold to investors and bond mutual funds. Several issuers went into default. Spreads between investment grade corporate paper and government securities widened dramatically. All of those situations caused investors to realize losses or have to mark down fixed-income investments.
The lesson: Fixed-income investments have their own unique risk characteristics, which could cause losses and volatility greater than that of stocks.
Were excess new houses built, or did enough people flee leaving their old houses on the market for a long time?
6. Leverage is a Centerfold Beauty on the Way Up, but a Harpy from Hell on the Way Down.
An excellent read.
6. Finish high school so you’re somewhat familiar with basic financial terms.
FYI
Agreed. Good read.
bump!
all variants of “a fool and his money are soon parted”
all too sad too many use this very formula to make money
simply by lining up enough fools.
On the fixed-income side, they’re likely to be lousy investments if the inflation rate picks up again. They may want to pick up some foriegn paper to hedge. Because of their new status as an oil power, the Canadians have investments that are looking might good.
No, no, no!
"We" should not be creating "public policies" to ensure that everyone has anything, other than their inalienable rights.
There is no right to "affordable housing"!
Why have so many people become socialists?
And so it is true with the housing market. I would bet that more folks made out than got hurt.
“Were excess new houses built, or did enough people flee leaving their old houses on the market for a long time?”
My take is that there are excess new houses. New buyers wanted new, bigger houses. I’ve seen lots of land cleared, and developments put up, while decent older housing was vacant.
Don’t forget to panic! And be sure to get others into a heavy frothy panic too. Misery loves company.
And the next bubble is?????....commodities?
This is a tad off topic (but not all the way!). I as amused by their reference to HGTV. I am an interior stylist (through the Art Institute of Pittsburgh). Can’t tell you how many wannabe designers thought they could do it on their own (”I saw it on HGTV...I KNOW you can do that!”) without taking into account codes, real costs, and the fact that design on a grand scale takes many years of study. Nothing like a 20 minute quickie lesson on television...sure beats going to school for four years, eh? And ANYONE can do it....riiiight.
Anbody have an idea where gold is heading? This stuff has gone out of site so far.
Actually - RIGHT on target!
OIL (by far #1)
Gold
Some Tech (Google, Amazon and Apple)
Copper and Corn
Any others?
Suggestions on where to buy gold. Buy the gold itself or stocks?
I agree - oil is at the peak of its bubble.
If you put a gun to my head - I would by the Vanguard Precious Metal Fund.
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