The authors of Freakonomics were on TV the other night. They have a new book out and a spawned an interesting conversation at dinner. Is the Stock Market a fair bet? Is it any better than the lottery?
I have always felt people who play the lottery are getting suckered into an unfair gamble, the odds are obnoxiously absurd against success, millions-to-one against your gain. Even the lottery advertises this fact ’somebody’s got to win’ is the best defense the ad campaign can muster.
So is the stock market any better? The last year has proved that it is not a zero-sum game. Someone doesn’t always win when someone else loses. Money invested in the stock market from July 2008-2009 was a loser bet, everybody sitting at that casino table stood greater odds of a loss than a gain, and the great majority of people lost more than they may have gained in that game over the past 10 years. The S&P was even over a 12 year period. It was as if a stock investor said in 1997 “here’s my $100,000 today for a cheeseburger in 2009.” Whimpy looks like a better investment.
Let know one be fouled stocks have substantial risk. Why? Because you are betting on something on which you have no control and thousands of data points can swing the results. You rely on the actions or in-actions of thousands of people: the company’s management, the company’s employees, the company’s competitors, suppliers, regulators, the other investors, the speculators, the traders, the foreign currency swings. The odds are stacked radically against your influence and control.
At least in the casino there are better odds. 52 cards, maybe 3 decks, so a 1-in-52 chance that the next card will be the card you want/need. Even Roulette, the worst of the casino games has better odds of your controlling the out come.
I don’t gamble, but I have made and lost more than a couple million of dollars in the stock market in the last 20 years. No exaggeration. I built up a nice war chest before 2000, and lost it all and then some in 3 months. Again, I was on a roll going into last summer with some great bets on bank stocks. I had learned my lesson in the dot-com boom. In 2003-2009 I would only bet on companies I knew and understood their business very, very well. I only invested in banks and real estate related firms.
Lesson learned. Only invest in things you have control over. Real estate is a long term asset, a buy and hold, no fast buck.
In rental homes, you have 1 bet, ‘will my tenant pay me rent this month in order to keep a roof over their family’s head?’ It’s simple. If they pay you win, if they don’t you have to find some one who will/can pay rent this month. Long term, you hope to have picked a home in a place someone will want to live 5-10-15-20 years from now.
Real estate prices are down. There is blood in the streets. I sold the last of my rental houses in 2004, it was a great business, but the rents were too low compared to the home values. There is a cycle to the real estate market. It is a long wave, not a short blip. Interest rates effect real estate values, the lower the rates, the higher the values -historically. If rates rise, home values could stay low. Rates will likely rise if we see rapid inflation. Inflation will raise home prices and rents.
Rents have risen since 2008, home values are down to 1990 price level. If indeed inflation is coming, real estate is historically a shelter in the storm. Tax incentives will make real estate even more interesting. The government will continue to prop up the housing market, it is a huge portion of our economy.
I am researching Real Estate IRAs (also known as Self-Directed IRAs). When I find the right provider, I plan to roll most of my traditional IRA to this vehicle and start buying rental homes again. We have a bank willing to lend up to 70% LTV - no recourse - on these homes. This means a $100,000 IRA can buy $333,000 worth of homes.
All rents go back into your Real Estate IRA tax deferred, any gains from sale would as well. I may even start buying an occasional lottery ticket.
It sounds like an exciting proposition, as the most important thing today is control.
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