Real Estate Investing For Retirement — Timing The Market — And Fools

Posted @ 11:30 am - Filed under Buying Income Property, Real Estate Markets, Retirement, San Diego Property Owners

I’m firmly ensconced in the long term school of investing. I make this transparently clear to all who come my way. My intent today, as always, is good, and from the heart. This post is long overdue, serious, and was inspired by a couple things. One I recently read, the other on TV. Someone was upset because his real estate investment wasn’t growing as planned. He’d invested a awhile back, and was upset about not being told he was at the top of the market. He must have mistaken the broker for Carnac the Magnificent.

Also, I saw an interview on TV with a first time real estate investor complaining his agent should have known back in the spring of ‘05 that the correction was eminent. My wife, as she was laughing nearly hysterically, grabbed the remote and changed the channel. She’d obviously decided having me around awhile longer was preferable to the insurance pay out.

Once the pleasantries are over, and we’ve become comfortable with each other, prospective clients, whatever their source, will be sitting in my office, or on the other side of a phone conference, waiting for me to get down to business. I start, more or less, with the same thing every time.

“My crystal ball is as cracked as yours. I don’t know the future — today’s market could be gone forever by next Tuesday. If you’re looking for me to guide you as if I know what’s coming — it’s guaranteed your future has disappointment in it.” (My clients hear that one so often, some lip sinc it with me.)

“Real estate investment requires you take the long view, and always look at the big picture. The long view doesn’t mean a year from now, either. It’s your entire investment life. The school of ‘right now‘ is doomed to failure. Grandma was right — patience is indeed a virtue.”

“If yer lookin’ to get rich quick, you’ve come to the wrong place. Wealth happens in its own time.”

“As an investor you must do things on purpose. Magnificent retirement income isn’t something you stumble upon one day. It requires a Plan, discipline, and sometimes, courage.”

“It’s called risk capital for a reason. Sometimes, the arrow on the chart? It goes down.”

A an old guy I met awhile ago, a long time San Diego resident, said to me, “Back in ‘74, I got out of the real estate market, selling my income property. Why? Because I saw the recession coming, that’s why.” So I asked him how he did when the recession was over. “I got back in around the end of ‘78 — just in time for the last year of appreciation before the ‘79 downturn hit. How was I supposed to know, right?”

Exactly. Of course, what he conveniently fails to remember is that he didn’t ’see’ the recession coming either. It was already here when he sold. It’s funny how some folks become seers — after the fact. When I brought that fact to his attention, his wife cackled. She knew.

If anyone ever tells you they know what’s gonna happen in the next 6-24 months — run.The direction doesn’t matter, as long as it’s away.

Real estate, like the stock market, must be viewed in the long term. Insisting on the short view will result in panicking in down times like today’s market, or, waiting too long to get into a rising market, like the above investor did. Timing real estate markets is a fool’s errand.

The Lesson

Nobody can time markets — nobody. We can see current trends, but there are countless examples of misleading trends. We can use history as an example, but when the present doesn’t follow the example of history, then what? We can guess. But in the end, timing markets is for those looking for the short term way to riches. It can and does lead to good folks either losing their capital or missing out on significant gains. The closest we can come is just that — close. Is a year off close? It is if it saved you a loss. But back in the huge stock market drop of October 1987, those who took the long term view didn’t lose a dime. My favorite (please pardon the expression) fools, are the ones who look to blame their brother-in-law, or their broker, or the stars, because they — get this — weren’t told the market was about to tank.

You just can’t make something that stupid up, folks.

Did the hedge fund geniuses time this market with their mortgage investments? Back in the early-mid 90’s, did the big time commercial real estate gurus (Lord I hate that word) warn everyone about the S & L Crisis, and the huge consequences it would bring to bear? No, they didn’t. It was an equal opportunity blood-in-the-street experience for all.

Since markets can’t be timed, how do we take advantage of the upward trends, and how do we protect ourselves against market corrections?

Again, it’s the big picture, the long view, however you wish to put it. Over time, the fundamentals will have their way. Here’s an example.

Let’s look at a generic region. There were many like this one. It was a job creating monster. Its population was growing steadily every year, and significantly. (In fact, it still is.) Builders did their demographic studies and fell in love. Both owner/users and investors flooded in. Quick — what city or region are you now thinking of? I’ll bet there are at least a dozen different areas that would spring to mind in a room filled with 20 investors.

How are those areas doing now? Did you invest when it was going well? Are you looking at the market now and wondering what you’re gonna do? Why?

Have the fundamentals that attracted you in the first place, changed at all? Is the area still sporting a solid job atmosphere? Is unemployment still at acceptable levels? Are people wanting to move there from other regions? Are they in fact still moving there? The answer for most of the areas is a resounding yes.

In other words, the fundamentals are still in place. Of course, for some places that’s no longer true. Wow, different areas respond differently to changing times. Quick somebody — write that one down.

Let’s take a look at some history, which will give us some empirical evidence to support the long view school of investing.

Let’s say you bought a duplex in San Diego back in the summer of ‘78 like our friend mentioned above. You were sailing along for about 12-15 months when Bam! along comes October of ‘79 and everything goes haywire. What’s haywire you ask? FHA interest rates of over 16% or so. Ouch. Inflation of over 20%. Prime rate not much lower. Conventional rates that were laughable — if they hadn’t been so dang depressing at the time.

So, what happened to the guy and his duplex? First of all let’s look at his choices.

Nobody would buy it with interest rates higher than their neck size. So selling was pretty much off the table unless he wanted to lose money. His only real option was to sit and wait it out. His tenants for the most part weren’t going anywhere. His operating expenses weren’t affected. Even if rents did decrease, his losses would be chump change compared to a panic sale. (Not to mention there was no reason to panic.) He muttered under is breath, using hindsight.

What happened to those whose timing got them into the San Diego market in ‘78?

They went about the business of living their lives. If they were prudent, and had their own Sominex (Ambien for the under 40 crowd) Accounts, they waited until the factors which were totally out of their control, had worked their way through the cycle. By the end of ‘83 or so, the market was calming down, and on its way back to what most investors might call normal.

That was an eternity for investors late into that four year ride up the elevator. They saw their investments either flatten out, or decrease in value a bit. Selling or exchanging? With interest rates in the upper teens who was gonna be your buyer? But now normalcy was on the horizon, and investors were breathing a lot easier.

By the end of ‘85 the next up-cycle began to take hold. If duplex guy had exchanged up any time between 1987 and 1988 he would have made a tidy profit, and acquired more property. It would have re-ignited his capital growth rate, while significantly increasing his tax shelter. As a byproduct, his future flexibility would have increased dramatically. How? Because of his increased investable capital, he’d have been able to increase the total value of his holdings, and increase the number of them as well. This would in turn give him more options when opportunities arose.

Now, when he bought that duplex in ‘78, was it his Plan to hold them for a decade? Probably not. In those days, two years was considered almost forever. Everything and everyone is hostage to the reality of the market in which you’re operating at any given time. Should he look to blame himself or someone else for his timing? That’s just plain stupid — and patently unfair.

Unless he can produce his own, or someone else’s crystal ball, or maybe the local fortune teller, just chalk it up to not having the much sought after psychic gene. The #1 reason investors get upset at times like these, is their timing wasn’t perfect, and their Plan will have to adjust. Well Excuuuuuuuuse the market, and all those fortune tellers who forgot to send them the memo, but this is part of being an investor.

At least once every time I see a client, whether they are brand new, or old buddies, they hear me say my crystal ball is as cracked as there’s. Nobody knows the future. You don’t, Bernanke doesn’t, and I guarantee you I sure don’t. Anyone who complains about investing with less than perfect timing, isn’t taking the long view.

Whether the investor kept their own counsel, or had an advisor, complaining about the timing of their investments not accruing to their advantage in the short run, makes them look foolish. Show me the investor, or broker/agent who has predicted all the downturns and booms in the last 40 years, much less timed them perfectly. You can’t, because there are none. If there was, we’d all know exactly who they were.

Ask Donald Trump about timing the market. Yeah, right. Case closed.

There are many people who think they’re owed an explanation for their investments not performing the way they were supposed to, because, they say, nobody told them the correction was coming, or could come. Hellllllloooooo — yooohoooo. Anybody there? Forest Gump only lands on his feet in the movies, not in real life. For those who think they should’ve been warned about what the future holds? Again — that’s too stupid to make up.

This is why I consistently, repeatedly, tell folks my crystal ball is cracked. I sometimes follow that with — and so is everyone else’s.

News Flash — Here’s an axiom for investors to keep close to their hearts: Investing of any kind ain’t for sissies. Any experienced investor will tell you this is one of the first lessons they learned.

30 years ago my dad and I, plus his buddy, invested equally in some local San Diego county land. Murphy followed us until we cried uncle. The Board of Supervisors were against our plan. Ultimately we ended up selling for a pretty painful loss. Could we have predicted the Board would think splitting land into four parcels larger than seven acres apiece was being extreme? Of course not. Did we whine and complain? Yep — for about a day, after which Dad told me to (can’t really print it here) and move on.

So ask yourself a few questions. If you invested in a market toward the end of the boom, did you know we were at the end? Did you know of any professionals who knew for sure the up-trending market was at the end? Did you read anywhere at any time anything but opinions about when the boom would end?

No, you didn’t. Everything we’re reading and hearing today is shrouded in 20/20 hindsight, disguised as brilliance. If they were that bright, they’d be up there with Gates and Buffett. And we all know they’re not. If there’s anyone who preaches long term outlook it’s Mr. Buffett.

Another axiom for investors: 20/20 hindsight is definitely not a sign of brilliance — but it can offer insights for the future. Those insights however shouldn’t be mistaken as slam-dunk future indicators. Markets tend to mimic life — and though many things in life tend to repeat themselves, there’s enough curve balls out there to keep everyone humble.

Here’s what I read and heard back in 2002.

Interest rates are about to skyrocket.

We’re still waiting.

Be careful, this boom is about to bust.

They were right — 3½ years later.

San Diego simply cannot get any higher priced.

Right, only 30-50% higher, depending on location.

Historically, real estate booms last 2-4 years or so. Learn from that.

1997-2005 isn’t 2-4 years.

And my all time favorite?

You’ll be far better off waiting for prices to fall back to 1997 levels.

You holding your breath?

There’s no way to predict markets with any degree of certainty. This is why prudent, wise investors are flexible, have generous cash reserves, and take the long view. They realize anyone with an IQ with three digits to the left of the decimal point, knows the market goes up and down. This isn’t news to them, because they’re literate, and have been reading about investing in real estate and the stock market since they first though about investing themselves.

The fundamentals of job creation, unemployment, interest rates, business sales, and the like, will only give you an idea — not a message from the Lord.

As I write this, NBC’s Wall Street Journal Report was airing an interview with a well known investor who has a net worth in the high eight figures, almost all of it from the stock market. He was asked point blank if he was currently buying ‘financials’. (Stocks or securities directly related to banking, or actual loans.) His answer was an unequivocal YES. He was then asked, (with a smirk on the interviewer’s face) why he wasn’t afraid of what might happen in the next 1-12 months or so. His answer reminded me of the natural beauty and living memorial to long term thinking that immediately comes to mind as I view the oldest known tree on earth. It was magic to my ears:

“I’m not concerned about the short term. I invest for the long term, as I’m always more interested in the big picture. In 10 years I expect to be very happy with the decision to buy them today. This current problem is short term, and is being dealt with.” (paraphrased)

He then went on to call for the resignation of the current Treasury Secretary, who he described as woefully detached from his job requirements. He went even further when he said outright, that hedge funds should absolutely be regulated, as they have proven, in front of everyone who cares to look, that they cannot be trusted. This reminded me of similar statements made when we ended up re-regulating the savings and loan industry. They proved they couldn’t regulate themselves either — to the great regret of the entire country.

The two take-aways for today are axiomatic to the very concept of investing.

Successful investors take the long view. They don’t celebrate bumps in the road, but they also realize they will ultimately win if they keep their eye on the big picture. And the big picture is way longer than a couple years. The big picture begins with 10 years, and goes out from there.

There are no Wizards around telling us what’s just around the corner.If some investors are upset by this fact of life, they shouldn’t be investing. There’s a reason it’s called risk capital, and one of those reasons is we don’t know the future. If an investor is upset nobody told them this correction was coming, he’s, uh, not, uh, shall we be kind and say, not suited for the investor’s life — or its long term rewards.

If an investor requires a guarantee, the best advice I can offer them, is to go to Sears. They’re pretty good about that sort of thing. That advice comes from the heart. Not everyone is suited for a life of investing.

This entry was posted on Monday, August 20th, 2007 at 11:30 am and is filed under Buying Income Property, Real Estate Markets, Retirement, San Diego Property Owners. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.