Real Estate/Mortgage Loan/Stock Market

[squiffy]

Sorry. I incorrectly reported my NOK return. I have three accounts. One cash, one traditional IRA, and one Roth IRA, so it is a bit confusing to parse out all the different trades.

And I made the mistake of comparing the total account balance for 7/04 with the total account balance for 7/05. It is true that from that period the balance went from 107K to 160K. But that is not the correct return for NOK only.

I actually started buying in April 04, so the holding period was more like 1 year 3 months. And I started buying NOK at 17, 16, 15, 14, and 13. It kept dropping, so that initially I was losing money on my initial buys and praying that it would recover. Luckily I initially made small purchases after it dropped from 23.

In any event, my account initially had 120K and DROPPED to 107K, before slowly recovering to 160K. So the real total increase is only about 40K or about 30% over 15 months.

Adjusting to a 12 month return, the return was about 27% according to the gain loss calculator which Ameritrade provides.

Sorry about that.

Anyway the point is that it is possible to make more than 6% a year on the stock market.

Though it is also possible to lose your ass (I mean your donkey).

By comparison, my cash account went up only 6% because I lost a lot of money trying to short CFC and buying puts in CFC, which proceeded to go up. No thanks to Adios.

And my ROTH IRA account went up about 16.7%, but as there is only about 15K in that, it's a nice return, but doesn't really change the weather in terms of early retirement.

[laserboy]

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My point is that it's not that hard to beat 4% a year. Heck, some stocks pay 2% in dividends and also appreciate.


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Your premise is sound and your strategy would have been extremely successful over the past few years. But many people who borrow at these rates today will end up investing in vastly inflated asset classes such as the real estate market or the US stock market and get burned badly. My personal belief is that at some point in the future, as has happened periodically through history, the average citizen will be begging for 4% returns.

Most of our generation doesn't have much fear because they have never really experienced a prolonged bear market before. You would have gotten completely owned investing in stocks during the 1970's, and bonds were considered the superior asset class based on returns from the previous few decades. Most of us probably weren't even alive during that. And this was nothing compared to the 1930's or Japan in the 90's.

They have been giving away money in Japan for a decade. How has that worked out for Japanese investors?

http://finance.yahoo.com/q/bc?s=%5EN225&t=my

http://www.economist.com/images/20050618/CSF103.gif

[Sniper]

If you own a home and are truly concerned about a housing bubble and want to protect your gains, you should take out some insurance in the form of LEAP Puts on housing stocks as a hedge.

[GeorgeF]

It depends on how things play out. For exmaple in Argentina when things blew apart alot of people lost their jobs so they could not pay their mortgages. The gov of Argentina desided that they would issue a new currency, and guess what mortgages had to be paid in the new currency with a principle indexed to salaries or something.

Also note that while inflation erodes the value of the principle, assuming you get pay increases in line with inflation, depreciation erodes the value of the building while costs taxes ect must be paid. Finally their is no way to predict where land prices are going.

[lu_hawk]

this is not the 'magic of the american economy'. it is LEVERAGE, and it works both ways. lets hope house prices keep going up forever.

[imported_bingobazza]

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I read recently that the real estate bubble is currently hndreds of times bigger than the dot com bubble and that the world has never seen a bubble so large when measured in USD.

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I don't have a link handy but compare real estate prices in Tennessee and Southern California then tell me there's a real estate bubble in Tennessee. Mentioned many times on this forum real estate markets are localized and not ubiquotous.

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You are ofcourse right, the bubbles exist mainly where there are major pockets of speculative excess...and the US in general qualifies, even thought there are still pockets of value, as there always will be, much like the stock market.

During a property price slump, however, much like the dot com bust, when many unconnected companies got dragged down as well as the Hi tech companies, places like Tennesee could well see slips if the wider market goes down....the delusions of crowd behaviour takes over at stressful times like these...and no where is totally safe. Rental income levels, like dividends, provide a floor for prices, as does smart buying, in both property and stocks.

Nevertheless, this global property bubble is truly gargantuan. The warning signs are scattered throughout this thread...ignore them at your peril.

Bingo

[squiffy]

Japanese basically don't invest. They save at low rates.

They don't have as strong and diversified a stock market as we do and the average Japanese simply doesn't invest as much as the average American. Think America in the 1940s or 1950s when investing was still only for the wealthy and not really for the masses.

There is much more corruption in Japan. And Japanese banks have not written off their bad loans. So there are lots of structural, legal, and socio-cultural problems with the Japanese economy.

I imagine we will see high inflation again some day. I don't have much confidence in the ability of American government to balance its budget or to avoid costly wars.

[squiffy]

I have looked at that, but the puts themselves are very expensive and cut heavily into your potential profit. The stock has to drop a tremendous amount before you make a profit. Though perhaps builders and mortgage lenders' prices will collapse so dramatically over the next 2-3 year that you will profit, even after the cost of the put.

[Sniper]

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I have looked at that, but the puts themselves are very expensive and cut heavily into your potential profit. The stock has to drop a tremendous amount before you make a profit. Though perhaps builders and mortgage lenders' prices will collapse so dramatically over the next 2-3 year that you will profit, even after the cost of the put.

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If you believe that we are in a bubble and its about to burst, the cost of put insurance as a hedge is cheap. If you are worried about the insurance cutting into your potential profits from continued home value appreciation, then you must not think the bubble is about to burst.

[squiffy]

Sometimes insurance is too expensive. Puts only go out 2-3 years.

Greenspan made his irrational exuberance comment before congress in 1997. The market didn't crash until 2000 or 2001. About 3-4 years. It's hard to predict when a bubble will burst, even if you know it's a bubble. That's the nature of a bubble, it's irrational and prices can reach irrational and unpredictable heights for an unpredictable amount of time.

Later I will post some put prices and we can talk numbers. Do you actually have some experience with puts? Or are you just speaking theoretically.

If you have actually tried shorting or buying puts, you may find it's not necessarily cost effective. Cuts pretty heavily into your profits.

It's like the difference between home ins. or car insurance vs. flood insurance if you live in a flood zone.

Certain kinds of insurance are cheap because the risk can be spread effectively.

It's not clear to me that options are traded widely enough to make them a cost effective hedge. And you have to pick the right stock.

If you really are familiar with puts, and can talk specific numbers for specific companies, that's great.

If not, we just have to agree to disagree.

I own one home in CA that I bought in 2002 for 200K. Now appraised at 420K. I bought one home in TX in 1993 for 183K, now worth about 250K or so. Not really sure.

I have about 340K in Ameritrade accounts. Mostly in retirement accounts.

In theory what you are saying makes sense. I agree with it. In practice. It's hard to find the right stock and hard to put in place a cost effective hedge.

But I am happy to talk specifics if you have experience with puts and can post some specific prices for puts on specific stocks.

Adios are you out there? Do you agree now that homebuilders and mortgage lenders are starting to tank or will tank.
Which ones are most likely to drop precipitously?