Received honorable mention. Put on own socks. Enjoys lists.
Disclaimer:
Posting in list form is for the lazy and the epistolarily challenged. However, in an attempt to get more readers than the tens of thousands who already stop at Control Your Cash regularly, we’re following the edicts laid down by the people at ProBlogger. They recommend a different daily exercise for a month. Today is Day 3, and the exercise is…a post in list form. It’s embarrassing to even reference this contrived method of indirectly canvassing new readers, but in a couple of lines we’ll move from self-flagellation back to financial advice. Let the form of this week’s post be a lesson in the virtue of seeing a commitment through, no matter how dumb parts of it seem.
So here’s our list. Of investments it’ll be OK to make for the foreseeable future:
1. Commodities.
These are the protoplasm of the market, the most fundamental securities of all.
What are most institutional investments, really? A bank account sounds simple, but on its surface it’s somewhat intangible – it’s really a bet you’re making on the credibility of the bank and its officers. In a sense, you’re wagering that the bank’s lending and borrowing policies are conservative enough that the bank will pay you back with interest.
Say you advance to a slightly more sophisticated investment – 100 shares of Ford Motor Company. Ford, somewhat unsurprisingly, makes cars. They also make parts and lend money, but their primary business is the creation of Mustangs and F-150s. When you become a shareholder, your investment doesn’t directly correspond to a particular car, or part of a car. What you’re really buying is another intangibility – the future prospects of the company. You’re hoping that Ford management is adept enough at its primary business and its ancillary businesses that the $1013 you invest today will appreciate.
But commodities are as tangible as it gets. You buy a commodity, you’re actually buying cotton, hay, milk, heating oil, light sweet crude, gold, whatever. Take the unassuming soybean, available for about $1000 per metric ton. Soybeans fill bellies, thus taking care of the most basic human requirement. Soybeans trade in a more sophisticated manner on today’s Chicago Board of Trade than they did in the Sumerian marketplace of 6000 BC, but the principle is the same.
Remember the hierarchy of human endeavor. With apologies to Abraham Maslow, mankind’s highest occupations are, in descending order:
1. agriculture
2. engineering
3. medicine.
First, we need to eat. Second, we need devices that free our labor for other uses. Third, this all loses meaning if we get sick and die. The farmers, engineers, doctors and their related professions do all the productive work on this planet, while the rest of us just emit carbon dioxide. There’s nothing wrong with this, as we all benefit from the symbiotic relationship among the 3 categories above. The engineers create the axial-flow combine and develop superphosphated fertilizers, making the farmers more productive, which makes food cheaper, which frees the remaining 98% of us up to become investment bankers and bloggers.
2. Single-family homes.
Good Lord, there’s never been a better time to buy a house.
Even if you’re as unobservant as a TSA official, you might have noticed that home prices have dropped in the last couple of years. A desultory look online can show you graphs that demonstrate how 2009 median home prices are essentially what they were in 2001. You can find other graphs that seem to state that the recent bust has lowered home prices to levels not seen in 100 years.
“Median” doesn’t mean “average”. “Median” means this: say you ranked all 110 million houses in America in order of price – starting with the $20 house in Detroit we mentioned a few weeks ago and ending with Susan Saperstein’s $125 million home in Beverly Hills. The median home would be the 55,000,000th on the list.
There’s no question that a median home in 2009 is more valuable than its 2001 (or 1890) counterpart. That 2001 house probably wasn’t wired with a flat-panel TV and a wireless router, or even an iPod dock. The 1890 house didn’t have a flushing toilet, let alone a fridge with a vegetable crisper.
Building materials have improved – everything from fiberglass insulation to your decorative cedar accents and maintenance-free exteriors. So…
-the quality of the median house has doubtless improved;
-the median house fulfills its function as well as ever. You can still live in it, and it’ll still protect you from the elements.
-yet the price has tumbled.
And houses are necessities. Economists talk about substitutes – if chicken gets too expensive, you’ll buy turkey. But there’s no substitute for shelter.
Now if builders are creating a product that’s superior to its predecessors, and the prices have shrunk in constant dollars, what does that mean?
It means there are too many houses and too few buyers. There are too few buyers because a lot of people either can’t get credit or can’t make enough money. Which means that if you can get credit (which you should, if you have a job and Control Your Cash), and if you make enough money (if you Control Your Cash), you should be making offers on whatever houses you can find. Not necessarily to live in, but to invest in. You’re supposed to buy at the bottom of the market. The market will never be (much) lower.
Don’t take our word for it. Listen to the clueless brass at the National Association of Realtors, while keeping in mind that that organization’s main agenda isn’t to increase home ownership, or to educate homebuyers, or to increase stakeholder value, or any of that nonsense. Their goal is to maximize the number of real estate transactions. If home prices stayed unchanged for the next century, realtors would still hope that people would want to move across the street to have the sun hit their windows from a different angle, and would gratefully take a 3% commission on every sale.
The NAR’s latest TV and radio campaign stridently reminds us “affordability has improved” (Corporatespeak for “houses have gotten cheaper”.)
Read between the lines. What they’re not talking about is how attractive an investment a house is. They’re (not) doing this for a couple of reasons. First, half the realtors’ clients are sellers, who don’t want to hear the inevitable truth that this is a horrible time to sell a house.
Second and more importantly, people are idiots and only assume an investment is worthwhile if it appreciated in the past, rather than the future. They see a graph of median home prices that points in a southeasterly direction, and they assume the pattern will hold – even though as we’ve shown above, that’s untenable. Prices can’t get much lower, or they’ll barely cover the labor and materials.
3. Your own judgment.
This isn’t any of that Jiminy Cricket personal motivation talk. We’re being practical here, as always.
Using your judgment means that when you’re confronted with an investment that sounds uncommonly good, look at what could possibly go wrong and ask the most challenging questions you can think of. Of all the people who’ve ever lost money investing, how many were merely the victims of haphazard market conditions, and how many refused to look at the economic reality that was staring them in the face rather than the heart?
The penny stock of a company that’s created a transcendent product, yet refuses to demonstrate the prototype. The cheap rural land that will soon sit adjacent to a burgeoning new development, except there are no roads and no water and no means of getting it there. The inert icon of American commerce that still trades on the New York Stock Exchange, even though it’s been losing market share to efficient foreign companies for decades and relies on government largesse to pay its suppliers. The clothing store that your friend is opening up, even though she has no experience handling a payroll nor a budget and only got the lease because the last tenant absconded and the landlord figures it’s better to set a few hundred dollars on fire every month than a few thousand.
Buy into any of those and you’re selling, metaphorically speaking, your judgment short. Think of the downside – even the surest things have a downside. If it’s as easy to visualize as the scenarios above, step back and let another pioneer take those arrows.
Wow, three items. That hardly counts as a “list”, but given that this week’s post is even longer than our average post (or our median post), it solidifies Control Your Cash’s position as the most comprehensive blog of its kind.
