Later this month I will be writing an article for Motley Fool that recaps the, what I believe is about, 65 articles that I wrote for them in 2004. I will talk about what went well and what I was wrong about. I only really blew about two or three of the articles. The worst one was a negative piece on QLogic (QLGC). The quick and dirty was that because the stock had fallen so much, as had competitor Emulex (ELX), the market was saying something was wrong with the host bus adapter market. I said it would take an unusual understanding of that market to know when to by the stock and that I would not buy it. The article came out on July 15 and the stock closed that day at $25.91. The stock worked its way lower until Aug 12 closing at $21.66 before turning around and going up to what is now $37.05.
Clearly I did not understand the stock, but of course I say that in the article. The point of this post is just that, avoiding things you don't understand. No one investor can understand everything. You can try to learn about things you don't understand but I don't know that I want to try to learn with my money, or my clients' money.
Another example is the homebuilder stocks. I have never understood how there can be seemingly infinite demand for new houses. The way the stocks have traded and the consistent p/e ratios probably means that the trend will continue but I don't understand how that can be. I'm not saying I would short the group but I am saying that I can't see myself buying a stock where I can't grasp how the supply and demand works.
A lot of the names in the group have gains in 2004 that range from 20%-50%. Well as I mentioned yesterday I am getting those types of returns with stocks that I do understand. If you own 30 stocks and 4 or 5 of them are going to be monster winners, does it matter what group they come from? I'd say no.
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5 comments:
I think there are actually studies showing that with many people the more they know about a stock the less sound their judgement. There are some obvious reasons for this, the more facts you know the moe you have to affirm your opinion.
I believe (note the "believe" and "think" I sould really bookmark the studies I've glimpsed and possibly misread) that relatively simple algorithms based on a few variables such as p/e or p/b have produced statistically good results.
Still I have to disagree with your last statement. I think building is risky, it's always been risky, it goes through cycles. For most people wonderful returns today don't matter if they get smashed 2 years down the road.
The whole "housing bubble" thing is subject to distortion because in many regions of the country prices seem relatively reasonable, there may be some upward shift in value, but it's like an S&P p/e of 19 rather than 14, it's quite possible perception of value and even real value (based on things such as reduced risk through indexing, more accurate models etc.) has increased. The relative value of things does change.
But there is in my mind no doubt that in many key markets housing has inflated beyond sustainibility. Along the coast in central California (Sonoma through big sur, northern California is entirely different cultural entity) prices have skyrocketed beyond the capacxity of 80% to afford, most who are buying are dloing so with ARMs often interest only for a while and balloon payments. Rents have fallen in the last few years, populations in many areas hit declines. People are "investing" and often foolishly. To some extent they are destroying the value of their properties, for example in the "horsey" regions of Silicon Valley many are fencing off their lands, closing the community riding trails, a real drop in value. Similarly in Carmel a third or so of the houses are dark weeknights because these are weekend homes, since half of the value was as a unique community which mantained a set of shared small business and also was able to mantain a less prosperous circle of eccentrics, they destroy the odd sort of "fashion" that attracted them.
Similarly people become increasingly distant from the sort of labor forces they need to mantain a high style and roads are clogged as the workers they get drive longer distances.
I personally am confident that in many parts of the country housing will take a drubbing. And booms are followed by panics.
David Bennett
David,
I can't disagree with your points, but I don't know if you will be right about a drubbing. Your point feels correct logically but there is nothing that says housing markets ever have to be sane or rational.
Markets are frequently irrational, this is one reason I hope for better public information systems, to reduce the flux.
But over time and on a grand scale markets are subject to various pressures.
Behaviors which can not be sustained are not sustained. The only caveat that comes about is the issue of when they break.
And there is real trouble when theoretically responsible people start to believe that *this time* the age old pattern is broken.
True life example: A couple with $150,000 in student debt get a $300,000 loan to buy a 2 bedroom condo in a ratty San Jose neighborhood. No dwon payment, interest only, balloon payment in 3 years, but they don't intend to pay it because by that time they will have pocketed a nice profit to make a down payment on a "real house."
With everyone from the real estate agent to the bank congratulating them on this financially mature plan.
Next in line and already started to be recruited are those who can pay "negative interest."
Meanwhile a good chunk of America has been persuaded to move their credit card debt onto their home and (gee why not? you deserve it!) get a bit extra on the side for their enjoyment or perhaps (if they are "fiscally responsible") invest in the market.
In 1990 houses fell about 20% around here, this time the build up is crazier. Understand this is in an area where 4 years ago cities were passing laws to keep storefronts from being turned into dot.coms and we now have freeways lined with nearly empty new office buildings. The office buildings were a no lose situation when they were proposed in the late nineties just like people mortgaging their house to buy an investment property which if a house pays maybe 5% a year of the total price before taxes, insurance, interest, repairs... in an area where rents are lower than they were 3 years ago, though still excessive.
It will all readjust in the end, but in between some people are going to get hurt.
- David Bennett
I just read an article on CA, saying that the state has 500,000 new residents a year, and builds only 200,000 houses a year. I'm not sure the breakdown of the 500K newbies; obviously, newborns aren't interested in real estate. Still, the population is increasing. Inventory levels are still fairly low (or so agents say).
Muckdog,
Not sure what article you read, but there are tons of articles, reports and stats that make it seem like RE will continue to appreciate at 20% per year for years to come. Assets don't usually do that but who knows? I wish I understood it better
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