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There's a very important lesson in here about investing, but not the one the author intended. From the article: "Suppose you find a stock that you know will in

by seldo 13y ago

There's a very important lesson in here about investing, but not the one the author intended. From the article: "Suppose you find a stock that you know will increase in value. You go to the bank and say, “hey, can I borrow $90k to buy this stock? I’ll put down a down payment of $10k.” You’ll be laughed right out of there." And then, later: "Now suppose you find a house that you think is a good deal for $100k. ... suppose you go into the bank and say “hey, can I borrow $90k to buy this house, and I’ll put down $10k?” If you have decent credit, you’ll get the loan easily." Leverage, i.e. a multiplication of your investment by borrowing money, is quite frowned upon when investing in stocks[1] but is not frowned upon, in fact positively encouraged, when investing in real estate. This is because "owning a home" has a sentimental value attached to it by policy makers that equity investing does not. It is a weird market distortion caused by bad policy, particularly in the US. Leverage by retail investors is frowned upon because they can get badly burned and lose a ton of money. Real estate is not as volatile as equities, but as the financial crisis of 2007 showed, large numbers of retail investors going into real estate solely as a speculative investment can lose them huge amounts of money. In all investing, the size of your return is related to the risk you are taking on. If you can get a 30% return investing in housing, as the author suggests, and only 6-7% investing in mutual funds, that's because housing is 4-5x more risky than a mutual fund. Higher returns are not just sitting around waiting for you to notice how much more money you can make. So by all means leverage away if you've got capital and want to take on more risk for the chance of higher reward, but don't go into it thinking it's an "almost guaranteed way" to make money, as the author has concluded. [1] Unless you are a large bank, but that's a whole other story.

eterm 13y ago
Indeed, the OP made money in a market which governments are desperate to prop up and make sure keeps rising and seems to think "that was easy, anyone can do it!" which is a terribly takeaway message. Also, it all builds toward plugging a book which raises my sceptical eye just a little.
- seldo 13y ago
  Good point. Especially since his Amazon affiliate code is tacked onto the end of the URL.
- anonymous 13y ago
  > Also, it all builds toward plugging a book Ah, so it's not just investment advice, but also a practical example of good marketing.
guard-of-terra 13y ago
Why is all real estaste risky? A good apartment in a historic stone buikding in SF will be worth a lot no matter what, even if the whole USA crash and burn USSR-style. Because the supply is limited. A house in suburbia? Not so sure. That's your main take-away from economic disasters.
001sky 13y ago
Leverage by retail investors is frowned upon because they can get badly burned and lose a ton of money NB>Its frowned upon because the lenders can lose money.
crystaln 13y ago
> "Suppose you find a stock that you know will increase in value. You go to the bank and say, “hey, can I borrow $90k to buy this stock? I’ll put down a down payment of $10k.” You’ll be laughed right out of there." Actually, pretty much any brokerage will allow you to purchase with "25% down" on a margin account. It is extremely risky as at that point, any drop will force a sale and a 25% drop would completely wipe out your capital and leave you with nothing. It's certainly not difficult to borrow money to purchase equities. > This is because "owning a home" has a sentimental value attached to it by policy makers While it's true policy makers unnecessarily encourage home ownership and related credit, that is not primary reason credit is more widely available for real estate. Equities are extremely risky - companies can and do go bankrupt overnight, wiping out shareholders. Real estate, particularly expensive real estate, always retains some value and can always recover in value. Real estate very rarely collapses into worthlessness, whereas almost all equities eventually will. > the size of your return is related to the risk you are taking on Not true. Markets are not that efficient, and information, understanding, and wisdom are not equal, and credit and cash availability varies widely for different people and assets. Finding a good investment opportunity, by definition, is finding an investment with lower risk and higher return. Purchasing real estate in 2008 was low risk, high return. This was a market distortion caused by credit contraction and irrational panic. In addition, real estate has higher return because it requires work and adding value by maintaining buildings, finding and managing tenants, etc - these are not related to risk/return. Anyway, sorry - this is just too much information not to challenge.
- javert 13y ago
  > Markets are not that efficient, and information, understanding, and wisdom are not equal, and credit and cash availability varies widely for different people and assets. This rings very true. It's like the old joke: An economist is told that there is a dollar bill that has been dropped onto the ground, and it's his if he picks it up. "Nonsense," he replies. "If there has been a dollar bill there, someone would have already picked it up!"
616c 13y ago
> "Suppose you find a stock that you know will increase in value. You go to the bank and say, “hey, can I borrow $90k to buy this stock? I’ll put down a down payment of $10k.” You’ll be laughed right out of there." Excuse me, but my history lessons escape me. This is called buying on margin, no? Just this time it is with a bank? I just want to know if I remembered correctly, because I thought this was responsible for something called the Great Depression in a very significant way. Haha.
Tichy 13y ago
I would have thought banks prefer to lend money for buying houses because they get the house as a security (if the lender can't pay up, the bank gets the house). Presumably the notion that houses are relatively stable investments lies behind that notion, but still, I don't think it is just a whim of policies. In any case it seems easier to judge the value of a house than the value of some random stock, which might also be something banks like.
jsonmez 13y ago
Good point... for speculative investing. But investing in real estate for the long term where your leverage is not too great and the asset produces enough income to easily cover dept service is very low risk.

by seldo 13y ago

eterm 13y ago

Indeed, the OP made money in a market which governments are desperate to prop up and make sure keeps rising and seems to think "that was easy, anyone can do it!" which is a terribly takeaway message. Also, it all builds toward plugging a book which raises my sceptical eye just a little.

seldo 13y ago
Good point. Especially since his Amazon affiliate code is tacked onto the end of the URL.
anonymous 13y ago
> Also, it all builds toward plugging a book Ah, so it's not just investment advice, but also a practical example of good marketing.

guard-of-terra 13y ago

Why is all real estaste risky? A good apartment in a historic stone buikding in SF will be worth a lot no matter what, even if the whole USA crash and burn USSR-style. Because the supply is limited. A house in suburbia? Not so sure. That's your main take-away from economic disasters.

001sky 13y ago

Leverage by retail investors is frowned upon because they can get badly burned and lose a ton of money NB>Its frowned upon because the lenders can lose money.

crystaln 13y ago

> "Suppose you find a stock that you know will increase in value. You go to the bank and say, “hey, can I borrow $90k to buy this stock? I’ll put down a down payment of $10k.” You’ll be laughed right out of there." Actually, pretty much any brokerage will allow you to purchase with "25% down" on a margin account. It is extremely risky as at that point, any drop will force a sale and a 25% drop would completely wipe out your capital and leave you with nothing. It's certainly not difficult to borrow money to purchase equities. > This is because "owning a home" has a sentimental value attached to it by policy makers While it's true policy makers unnecessarily encourage home ownership and related credit, that is not primary reason credit is more widely available for real estate. Equities are extremely risky - companies can and do go bankrupt overnight, wiping out shareholders. Real estate, particularly expensive real estate, always retains some value and can always recover in value. Real estate very rarely collapses into worthlessness, whereas almost all equities eventually will. > the size of your return is related to the risk you are taking on Not true. Markets are not that efficient, and information, understanding, and wisdom are not equal, and credit and cash availability varies widely for different people and assets. Finding a good investment opportunity, by definition, is finding an investment with lower risk and higher return. Purchasing real estate in 2008 was low risk, high return. This was a market distortion caused by credit contraction and irrational panic. In addition, real estate has higher return because it requires work and adding value by maintaining buildings, finding and managing tenants, etc - these are not related to risk/return. Anyway, sorry - this is just too much information not to challenge.

javert 13y ago
> Markets are not that efficient, and information, understanding, and wisdom are not equal, and credit and cash availability varies widely for different people and assets. This rings very true. It's like the old joke: An economist is told that there is a dollar bill that has been dropped onto the ground, and it's his if he picks it up. "Nonsense," he replies. "If there has been a dollar bill there, someone would have already picked it up!"

616c 13y ago

> "Suppose you find a stock that you know will increase in value. You go to the bank and say, “hey, can I borrow $90k to buy this stock? I’ll put down a down payment of $10k.” You’ll be laughed right out of there." Excuse me, but my history lessons escape me. This is called buying on margin, no? Just this time it is with a bank? I just want to know if I remembered correctly, because I thought this was responsible for something called the Great Depression in a very significant way. Haha.

Tichy 13y ago

I would have thought banks prefer to lend money for buying houses because they get the house as a security (if the lender can't pay up, the bank gets the house). Presumably the notion that houses are relatively stable investments lies behind that notion, but still, I don't think it is just a whim of policies. In any case it seems easier to judge the value of a house than the value of some random stock, which might also be something banks like.

jsonmez 13y ago

Good point... for speculative investing. But investing in real estate for the long term where your leverage is not too great and the asset produces enough income to easily cover dept service is very low risk.