Getting 100% Returns

I’ve learned over the years what to look for in potential 100%  investments, or as Peter Lynch would say, the double baggers. If the public largely agrees with your thesis, then watch out: you may return 100%, but it is likely you are profiting from the tail end of a bubble. This means you can just as easily lose 50%. On the other hand, if the public lectures you about why your investment is just plain nuts, rest assured, you may be sitting on a 100% investment. In any trend reversal, it is the smart money that steps in while the public is scared out of their minds. This is a situation I see for real estate in late 2011.

I personally think that real estate in certain parts of the country will return multiples on invested equity. Now let me give some perspective here. Readers of this blog knows that I have been consistently bearish on real estate while the mainstream was bullish. I am by no means bullish long-term on real estate as an asset class. But there are times when you just have to step in because values are so compelling. No one can consistently catch bottoms- heck even Warren Buffett didn’t catch the exact bottom in stocks. Nonetheless, compelling valuations are pretty obvious things to spot; it is always just a matter of stepping in when value presents itself.

I keep hearing about distressed selling and how this is bearish for real estate. Umm, from a buyers perspective, aren’t distressed sales a good thing? Wasn’t the bottom in stocks preceded by distressed selling? I’m seeing a lot of things that have me leaning bullish on housing in certain markets in the short-term. I’m seeing distressed and conventional prices converge. The cost of carry is falling substantially below rental yields.  Housing affordability is rising to multi-decade highs because home prices are falling along with interest rates. And if inflation is set to rise, who wouldn’t want to repay a fixed loan with depreciating dollars? The fundamentals for housing are the most favorable since the bubble popped 5 years ago, yet people are the most bearish. Interesting.

Armchair Investors vs Real Investors

What perhaps amuses me the most is that I get the most nonsensical lectures from people who don’t invest at all. When I say that real estate values in certain parts of the country are compelling, this means I’m fully prepared to put my money where my mouth is. When I support a certain viewpoint with conviction, I’m not trying to win an argument, I’m trying to double and triple my investment. I have a different perspective. If the fundamentals for pork bellies implied a 200% return, I would invest without hesitation. I have no allegiance to any asset class and I reserve the right to change my mind for the sake of maximizing returns. Sorry if this offends people.

I personally believe housing will continue to come under pressure for at least the next couple of months. As a short-term bottom in housing approaches, I’ll try to write a more comprehensive post with data points to support what is sure to be an unpopular perspective. Anyway, the point of this post is not real estate; it is about what it takes to attain monster returns. You must think opposite. You must have an independent mind. And you must be prepared to buy when no one else is willing to. When both permabulls and permabears attack your views, you are probably doing something right.

Getting 100% Returns is a post from: Expected Returns

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