- Your entry point, i.e. when you buy your first home
- When and how you trade up or down, should the need arise.
This week we’ll talk about the first item; next week the second.
If you read this blog, chances are you’re somewhat new to and/or intimidated by the whole investing thing. When any of us are new to anything, we listen to what “they” (the presumed experts) have to say. Well, here are two things “they” say:
- The secret to investing success, according to Warren Buffett and other successful investors, is “buy low and sell high.”
- Never time the market.
The first one is rather obvious, isn’t it? We’d all like to do that. But first let’s look at the second of those “truths:” timing the market.
You all know about the economic cycle, especially if you’ve been following my other (much quieter) blog, Drop Dead Money. The economy goes up and down, and with it, the price of most investments: stocks, bonds and real estate. And so, the obvious temptation for any investor is to link the two pieces of wisdom together: buy low when the economy is at a low point, and sell high when it reaches its high point.
Sounds simple enough, right? Simple enough to be very tempting.
Problem: it almost never works.
The famous Mr. Buffett has said several times he can’t do it. The inference is unmistakable: if he can’t, who are you and I to think we can?
If you’ve hung around me for any length of time you know I generally never pay attention to what people say. Actions speak louder than words, so I try to figure out what they do, rather than listen to what they say. And it might surprise you what experts actually do.
Timing the market, when you break it down, involves two separate decisions:
- Buying at the right time (low)
- Selling at the right time (high)
The problem most people run into when trying to time the market is usually the second item. In fact, when people say don’t time the market, they (without articulating it as such) usually only refer to the second part. How can I say that? Easy: every time the stock market is down, the very same Mr. Buffett turns into a veritable circus barker, telling everyone within earshot (and even those who are not) to buy, buy, buy because prices are low, low, low. And he not only says that, he does that.
What is that other than timing the market (part 1)?
Reason: it is a lot easier to know when the market is down. Granted, none of us ever know when the market has reached its bottom — that is only clear in hindsight. But when the market (any market) is 30% below its previous peak, you don’t need to be a rocket scientist to know pretty much any buy is a good buy, because if history is any guide (and what else do we have?) prices always recover. The only things we don’t know are how long and how much.
Furthermore, when you read his many shareholder sermons (and I really recommend that you do — link here), Mr. Buffett readily admits that when he decides to invest in a stock, he waits out the usual market ups and downs until he reckons the price is low enough to buy in. In other words, he times the market at its low end.
There is actually a term for that — it’s called picking your entry point.
And few things affect the success of your home as an investment as much as picking your entry point right, i.e. when home prices are at a cyclical low. How do I know this? I bought our first home in America at the height of the California property bubble in the early nineties. Ellen, a good friend, couldn’t. But she bought a humble little condo at the bottom of the bust. Today she has more than double the equity in her home than I do… and I made way more money than she ever did along the way. Although she didn’t do it deliberately, she picked her entry point right and her home as investment outperformed mine by a handsome margin.
Isn’t that how most great discoveries are made: by accident? People who learn from accidents get Nobel prizes, or at least a little wiser. I know I did.
So… timing is everything when you buy your first home — you can add several tens (or even hundreds) of thousands of dollars to your net worth by having patience and picking up your property when prices have dropped a bit from their current (high) level.
Be warned: every time I write about this topic, there is a flock of Pavlovian boo-birds who get this drug-addict expression in their eyes and crow: “Can’t time time market, can’t time the market, can’t…” You may not be able to time the market, but you can pick your entry point. Wise investors do it all the time. Ellen did. I wish I did. So when you hear people say you can’t time the market, be sure to know exactly what they mean (and don’t mean).
Another caveat to keep in mind with this strategy: when the economy tanks (as it does regularly) the sector affected most is banking. Recessions bring defaults and defaults come out of banks’ own pockets. That means they don’t have too much money to lend. Loans, therefore, are tough to get when prices are at their most attractive. Knowing that ahead of time, there are several things you can do… and if I remember that is what we will talk about in a couple of weeks or so.
What if you already have a home? What does “timing is everything” look like then? Be sure to check in for next week’s thrilling episode. 🙂