Some Thoughts

This post is going to be slightly different from my normal posts. I feel the readership of this blog has grown quite large and people don’t even know who I am. There may come a time in the near future when I stop writing because of projects I’m working on. I’ll do my best to offer my insights as this crisis unfolds, but I can’t guarantee it.

Well I’m 27 and I am an investor. I grew up in New York City and graduated from Columbia University with a degree in History. I probably took about 2 econ/finance classes in my life, and trust me, they don’t come in handy. I have no “profession”; I don’t work for anyone because I don’t have to. I love reading and thinking. I value my failures much more than my triumphs. I write this blog because I want to warn people, especially Baby Boomers, about what’s coming. I’m not trying to sell newsletters or books. I love having discussions with informed, open-minded people, and this blog affords me that opportunity. I know occasionally people want to bash me and my views as if I committed some unpardonable crime, but remember, I offer my insights for free.

How A History Major Can Get Economics Right

I think generally people make the mistake of stereotyping people and assuming things. There was a time when no one would believe anything I said about the economy even though my reasoning and logic were pretty clean. If I had worked for Goldman Sachs, perhaps people would have listened to me. Well let me just say this much: I went to a top high school and top college, so I know many finance types. The truth is that the vast majority do not beat the market. If they were great investors, trust me, they would not have to work another day in their lives, even at my age. I have spoken to people on the buy side in hedge funds who don’t even believe beating the market is possible. Huh?!! These people may be great at analyzing minute, inconsequential details, but they are not great at seeing the big picture. They are far from great investors.

The problem I see with most people, and this is becoming more obvious lately, is that they are too short-sighted. Analysts will spend all day trying to find the perfect model to find the correlation between, say, home prices and interest rates without doing the higher level thinking to understand what actually drives trends. Or they’ll make a common mistake of investors, which is to anchor their expectations according to prices. So for example, if stocks fall 10% in a month, people tend to think stocks are undervalued because they anchored their valuations to prevailing prices, even though those prices are not necessarily “right”. Is it any wonder that few saw the crash in stocks and real estate coming? Crashes are simply not in most people’s radar.

Because of the anchoring bias, a lot of people have trouble spotting tops and bottoms. The way I think, an asset or stock can go down 90% and it still doesn’t mean it’s cheap. You should always look for some objective way to value assets, otherwise you are investing blind. What makes a 500% move in gold nothing out of the ordinary and a 100% move in real estate extreme? These are the kind of questions investors should consider as thought experiments.

Short-term Memories

I always said I was a market atheist. Look back to my old posts: I said that real estate was going to double dip after the end of the homebuyer tax-credit. But pretty soon it’s going to be time to get bullish on real estate. I can play both sides. Of course the myopic permabears on the economy will bash me. These are the types of people who predicted gold would rise but stocks would fall. Instead of focusing on the fact that they were dead wrong about stocks, they will pound their chests on how right they were about gold. In their minds, it is inconceivable for real estate to rise with gold. They seem to forget about countertrend cycles.

For those with selective memories, let me remind you of the way assets move. Gold has been on a spectacular run, but did we not have a 80% bloodbath in gold stocks in 2008? Oil is trading at $113 dollars, but wasn’t it $33 dollars 2 years ago, and before that, wasn’t it $150 dollars? Who said bull markets only go up in a straight line? And who says that if you predict a correction you are suddenly a bear and if you predict a rally you are suddenly a bull? Investing is not that black and white.

“You’re Crazy” Theory

The more people think I’m crazy, the more inclined I am to think I’m right. Most people think I’m crazy to even conceive of a bounce in real estate. It’s funny, but experienced and successful real estate investors tend to agree with my bullish stance on real estate. I’ve spoken with many of them, and they are making money in this down market. Their knowledge of real estate is literally 100 times greater than the average person, yet it is the average person who thinks I’m nuts. It is those who were burned by real estate who think I’m crazy. Biases anyone?

One of the greatest compliments I can receive is when someone says: “Oh I never thought of it that way.” I get this a lot because I don’t conform in my thinking. There is a tendency for people to focus way too much on one or two variables. In terms of the economy, people focus way too much on GDP. In stocks, people focus way too much on P/E ratios. In gold, people focus too much on inflation. In real estate, people focus too much on their own personal experience. In general, people focus too much on conventional wisdom, which is foolish, because if we always relied on conventional wisdom, the human race would have never progressed. Do people forget this?

As I said earlier, analysts are too myopic and focus on the wrong details. I believe it is more important to connect the dots than to be the expert of one dot. I think it is more important to see dots that others don’t see. I think it’s more important to be objective. I think it is more important to recognize mistakes early and correct them instead of rationalizing them away. I’m not exactly sure if these are talents or skills, but these are things you need to be successful in investing, and I suppose, life. 

I hope to continue writing, but I can’t guarantee it. I hope people take away from this blog the importance of being objective. Stay open-minded, stay curious, and respect the opinions of others.

Some Thoughts is a post from: Expected Returns

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