Market Wisdom from My Dad
[Taken from March 2018 Timing Letter]
My dear old Dad would always tell me
that “the secret of success was avoiding disaster.”
To do that, you must control what you
You can choose when you buy and sell.
But what you can’t choose is what housing prices
and rents are going to do in the future.
The next market downturn may be mild, or it could be a real butt-kicker (or even fatal). When it comes to accessing risk, behavioral scientists have shown that humans repeatedly fail to make correct decisions because they get sabotaged by personal bias – which is why I support the use of systems.
Nevertheless, many investors buy (and hold) real estate because they “need income” – which I can understand. Everyone needs income.
But if you insist on investing in California real estate
for income, my suggestion is that you buy it at a bargain price
near the bottom of the cycle. That way, you will pay a lower
price for every dollar of cash flow that is produced.
That’s what’s called buying with a “margin of safety” –
whereby even if rents retreat moderately, a cash-flow investor
will still experience good results.
In the old days, those who bought real estate for cash flow were called “investors” because most people thought it was safe – and those who bought primarily for price appreciation were called “speculators” because it was deemed to be risky.
However in today’s more volatile real estate markets, I believe the opposite characterization is more likely to be true. Namely, the more experienced and intelligent the investor is, the greater his attention will be focused on profiting from price appreciation – and less so on cash flow.
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