Friday, August 15, 2008

Future Tense

The years 1980-1982 were an interesting time. We were just coming off a 20 year bear market in stocks. If you opened up a paper, talked to friends, or were looking for investment advice, just about the last thing you heard was that you should put your money into the stock market. Only 17% of American's even owned stock during those years. So looking back at what happened to the markets over the next 20 years from that point, what could have been the best possible investment class for you to be studying and learning about? Stocks.

Starting in 1982 we experienced an unprecedented run up in the value of American equities. While a big part of it was the creation of the 401K in 1984, by the time the year 2000 rolled around 84% of the country now was investing in the stock market. Many people were quitting their regular jobs to become day traders because there was so much money pouring into the market.

I like to look back at 1987-1990 as an interesting time in market history as well. A tax law was created in 1987 that severely hurt investors in real estate. A ton of properties were dumped on the market over the next few years, both residential and commercial, leading to a government act known as the Resolution Trust Corporation. This act pooled homes together and sold them into the marketplace at pennies on the dollar. Back in 1987, when real estate started it's decline, what would have been the best investment to be studying? Real Estate

In 1990 real estate found a bottom and went on a 15 year tear ending in 2006. From the year 1997 forward, if you had your money in real estate you could not lose and most likely you became very wealthy.

As real estate was just starting to take off in 1997, oil, gold, and commodities were perhaps at their lowest point in history. Money was pouring into the stock market and just beginning to enter the real estate market heavily, and commodities became virtually worthless. Oil was at $10 a barrel and gold was around $250 an ounce. I was in high school at the time, and when kids asked their parents what they should study so they could be successful, I would be willing to bet that geology was the last subject mentioned at the dinner table.

Now ten years later, as all the stock brokers have disappeared after the crash of 2000, and the real estate industry is becoming a fraction of what it was just a few years ago, who do you think is having the least trouble in the world finding a job? The geologists. Oil, mining, and natural resources are what you hear about when you turn on the news. Companies are dumping money on strong geologists and there are bidding wars for their services. The point of all this is that I spend a ridiculous amount of time thinking about and studying market history.

There are probably three areas of investment right now that are more out of favor than any other:

1. Residential Real Estate
2. Structured Finance
3. Commercial Real Estate

It may seem like I spend most of my time studying currencies, commodities, and natural resources, but that's not the case. I only talk about them the most because that's the bull market that we are in right now.

During the day I spend my time building a residential home building company. I sit in on land development meetings, I learn about putting together financial statements to bring to banks, and I learn about the systems necessary to run a large real estate company.
At night I read books about structured finance. I read about words like derivatives, CDO's, and ABS's.
For vacation twice a year I travel to different parts of the country and sit in a classroom learning how to invest in commercial real estate. I learn how to value buildings using software based on it's net operating income, cap rates, and growth potential.

Do I own a home, or any commercial buildings, or even stocks? No, my money is commodities. But I'm preparing myself for the window of opportunity that I mentioned yesterday. Just as a geologist was laughed at relentlessly in 1998, people cringe when I tell them that I spend my time learning to invest in real estate.

When will the window of opportunity open? I don't know, that's out of my control. All I can control is my preparation for when it does.

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