I watched the most insightful interview on CNBC today. It was an interview with Jeremy Grantham, and investment adviser and someone, if you had to look to for crystal ball-like predictions, you would be fairly safe entrusting. Grantham is very critical of the Fed; not for the reasons most critics are citing, like ballooning budget deficits, but rather because as he puts it, “The Fed is manipulating the stock market”. His argument in a nut shell is that the Fed is creating bubbles to create a ‘wealth effect’, so that consumers spend. He argues that this is not effective policy and that it compels markets to become over speculated and thus becomes a bubble.
Grantham advocates investing in emerging markets, undervalued blue chips like Coca-Cola that pay reasonable dividends etc., and he advocates cash. This is interesting as we consider what inflation does to cash; kills it really. However what I like, and have been doing myself, is keeping cash available to buy when the market drops. He called the holding back of cash, “Optionality”. I love that.
So why am I talking about equities when I am advocate for real estate? Further, why would I be advocating holding cash when I see inflation on the horizon? To quote Grantham: “Optionality”. To be able to take advantage dramatic declines in values – values of whatever asset you want to buy. John D. Rockefeller was once quoted as saying, “The way to make money is to buy when blood is running in the streets.” So this is my argument: real estate values are down 25-30% in our market and a lot more in other markets. Rates are down 30% over the past 3 years. With values down 30% and rates down 30%, blood, I argue, is running in the streets; money is cheap and fortune favors the brave. “Optionality” is the flexibility to buy when the opportunity arises, and now is just such an opportunity in real estate. I am not saying we are necessarily at the bottom of the housing market; however buying at the bottom is a game of smoke and mirrors. It’s impossible to get it spot on. Trying to guess the bottom is a matter of pure luck. Investors do not rely on luck, but speculators do. Savvy investors recognize good value, and then act upon it. Perhaps the investment chosen dips in the short run, but over time, the “Valley of the Bottom”, is not a V-shaped valley at all, but rather a U-shaped one. In this context, one could argue, as I am, that through the telescope of time, looking backwards, we will not see the “V” of the bottom, but rather the wide valley floor during which time we had ample opportunity to buy; a time when prices of real estate had plummeted and rates were artificially low. It is through this telescope that we will be boasting to our grandchildren or perhaps leaving the legacy to our grandchildren, of the story about the great real estate opportunity and how smart we were to take advantage of it.
Published on 2010-11-11 08:36:05