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Pessimism and You July 25, 2008

Posted by shaferfinancial in Uncategorized.
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Not to sound like a refugee from “The Secret,” but pessimism is an emotion that needs to be eliminated from an investor’s psychology.  Why?  Isn’t it a reaction to reality?  Well, no.  Currently, the pessimists are having a field day with the real estate market.  Indeed, the numbers look bad.  But remember the numbers are backward looking, so what they are telling us is that the real estate market in some areas was really bad.  Well, duh.  But, what those numbers don’t tell us is that real estate has always come back.  Let’s be honest, they aren’t making anymore dirt, people still need a place to live, and the emotion of home ownership is as strong as it ever was.  Bought your home in 2006, upside down?  So what?  Where you planning on moving?  Probably not. How many people buy a house with a 2-3 year time horizon?  The only thing that matters is that you take care of business so you can make those payments.  Real estate pricing will come back. 

Depending on building up home equity as your retirement plan?  Yes, I know that is the plan for the majority, but it is just dumb.  Now we see why, as you watch it disappear.

Less than a year ago I made a real estate investment.  It is about to pay off handsomely ahead of schedule.  How can this be, the real estate market is for fools?  Nope, many people are making huge profits in real estate, just not the pessimist.  My REIT went up 11% last year, plus paid out 6% in dividends.

Money is made is any market, just not by the herd!  Call me or e-mail me dave@shaferwealthacademy.com if you want to learn about building wealth the way the wealthy folks do!



1. Artur | Phoenix Real Estate - July 26, 2008

I know several people doing fix and flips in this market and making it just fine. There are others making good returns but sometimes it feels good to be a pessimist. One should at least be a conscious optimist; being aware of what is happening but knowing that in most cases its never as bad as it seems.

2. shaferfinancial - July 26, 2008

Always aware, always alert to opportunity. Some people allow fear to rule the day, no most people allow fear to rule the day. The internet is one place that allows emotion to run amuck. But, the reality is that folks are still making money in real estate/investments as long as they understand the basics and do their homework. The good times when everyone is enthusiastic are icing on the cake!

3. Sean Carr - July 26, 2008

11% on your REIT, not to Bad. I ended up 197% on PUT options on Countrywide bought to hedge my RE holdings. Honestly, I didn’t predict that kind of yield but I’ll take it. A less risky fund I hold is SRS, a REIT inverse fund, up a less glamorous 17%. Does pessimism become reality when it can be measured in dollars? Just applying basic financial strategies here.

RIETs are not looking good for 08/09. Let’s make a gentleman’s bet. I’ll take SRS at today’s price against your REIT for the next 12 months, care to post the ticker?

4. shaferfinancial - July 26, 2008

Sean, glad you are doing well. Eventually you will learn the lesson of all speculators. No bets, because frankly I have no idea about the next 12 months. I have demonstrated to myself that speculating (short term thinking) is not what I do best. The last speculation I did was about 10 years ago and the internet based stock tanked and went bankrupt!
No, I invest for the long term. And in the long term I am pretty sure that my REIT will do well, just as it has done well for the last 10 year time period. Maybe you are smart enough or lucky enough to speculate and do well, but if you are then you are in the minority. For you own edification the ticker is HCN, which I have posted before.
If you read my posts you will also note I hold much BRKBs. Another long term investment that has demonstrated superior returns. My wealth building plan doesn’t require me to speculate. The closest I get is by primary investing (not stock purchase) in businesses and projects I believe in. That is also doing well for me.

I’m glad you have real estate holdings and feel pretty certain that if you paid attention to the basics they will build tremendous wealth for you, which is the point. And by-the-way all your chest thumping doesn’t impress me because anybody can say anyting on the internet. When you have publically done it, like Buffett, for over 15 years, then you can chest thump and then I might invest in your business! And I don’t think you are necessarily a pessimist just because you are betting short term real estate goes down. Your analysis is just that and I might even agree with you short term. Betting against the market has a honored place in speculation. However, I don’t think short term and as a result don’t speculate.
Yours in wealth building.
Dave Shafer

5. Sean Carr - July 27, 2008

Unfortunately, it seems shorting has become unjustly labeled as a mechanism strictly employed by day traders and speculators. Options trading, or shorting for that matter, certainly is used to speculate but this is not always the case. It’s simply another type of investment tool. In my case I was fortunate, or unfortunate enough to hold Florida RE purchased in the 90s. I had no idea what would happen back in 05-06 though it seemed at least probable that I was going to have to give back some percentage of the unusually large paper gains made from 02 to 05. Since I wanted to keep the properties, a good way to limit the downside was a spread of PUT options (LEAPs) aimed at companies in the mortgage sector. At the time the decision was quite gut wrenching. In retrospect any company in the Financial or HB sector would have been a fine hedge.

PUT options can be though of insurance for illiquid assets in a volatile market in the case of a significant downturn. This lesson really hit home for me in April 2000 as I was working at a telecom company whose stock crashed 90%. Some wiser employees had hedged unvested company stock options with PUT options in case the much debated internet bubble burst. It did. Most of us lost a fortune in unrealized gains. A few ended up quite well off regardless due to the hedged position. Had the tech bubble not collapsed I would have been ahead of my hedged peers by perhaps 10 or 15%. I can tell you that I felt like the greedy speculator that year and suffered needless losses. Therefore when the housing bubble debate broke out and I found myself exposed on the long side with another illiquid asset class it was time to build a floor under the paper gains with LEAPs. I’d be perfectly happy not to buy another option contract in my life but I imagine that will not be the case. Is the hedged or the unhedged investor the speculator? It’s not an easy answer of course but when volatility is a concern short positions deserve consideration.

6. shaferfinancial - July 27, 2008

It all seems perfectly reasonable, now that you explain your situation, to hedge your investments. Thanks for the discussion. Your lessons learned have served you well! The best thing about this discussion, beyond my learning more about how to use puts, is that you demonstrated the ability to take control of your finances instead of just leaving it to the “financial experts.” This is the point of the Shafer Wealth Academy, to get people pointed in the direction of becoming sophisticated investors and to understand there is no one way to build wealth.

As to SRS, since it is betting against REITs either you are betting REITs will go down permanently, or it is a short term bet. Hence it is what I call speculation. Once again nothing against speculation, but it is not my cup of tea because the historical trend has been up long term which is how I now think.

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