WEB EXCLUSIVE COLUMN: Don’t put all your houses in one town

When people talk about bubbles, you invariably hear I-know-it-all or at least I-know-better-than-you comments like “There is a bubble, and it will pop soon!” or “No, there isn’t one, and prices will keep on rising forever.”

The thing is, nobody can be sure of anything in the future. Warren Buffett, the legendary investor, says he has never met a man who can predict the market. Charlie Munger, the philanthropist, says neither he nor Buffett has made any money from macroeconomic forecasting.

Prices of things depend on the supply and demand forces at work. And since nobody can accurately predict the exact supply of and demand for any particular thing, no one can predict its future price. Maybe some will come close within range for short-term prediction, but, as any old man with investment experience will tell you, any form of long-term forecasting will come out significantly short (almost without fail), potentially causing you great financial pain if you bet your ranch on it. Like Buffett says, he would rather be approximately right than exactly wrong.

How do we ensure that we are approximately right?

It’s true we can’t be certain of future supply and demand of things. However, there is one sensible thing that we can do, today, or at any point in our investment lifetime. And that is, to brush aside the emotions and to focus on the facts. Like Buffett says, in investing, we should always focus on the things that really count.

For an easy, practical and educational illustrative example, let’s take the housing market, as it is relatively hot right now, ever since a lot of investors (or, more accurately, “speculators”) lost a bundle in the aftermath of the bursting of the Dot Com Bubble a few years back and have since been plowing most of their remaining money and new earnings into the real estate market.

Back in 1929, near the peak of the stock market, right before the big crash, a famous Wall Street tycoon was having his shoes shined when the young entrepreneur looked up and asked if the tycoon had gotten into any stocks lately because the shoe polisher surely had. The tycoon quickly paid the young man, rushed to the nearest telephone and asked his broker to sell all of his shares. He was one of the few stock market investors who wasn’t badly burnt in 1929.

Back to 2005, when you see people around you buying multiple houses in hopes of capital appreciation, it at least inspires you to check the facts.

And the facts aren’t too good.

What counts here is the ratio of price to earning, i.e., house price to rental income. According to the Economist, that ratio is currently at a historic high.

When something is overpriced, it doesn’t mean the market will collapse soon. It may have a soft landing instead. But, when stacked against those harsh facts, you don’t want to bet your house on it.

Oh wait, it is your house. And you may be betting five of them. All I can say is: Good luck!

Michael J. Greenberg is a graduate student and a columnist for the Daily Kent Stater.

Editor’s note: Michael J. Greenberg is a pseudonym. He can be contacted through the editor at [email protected].