As I pointed out in a parallel post,
I recently drove from Chicago to Phoenix and had ample time to listen
to podcasts and catch up with a range of financial and business news,
among other things. While listening to one of the several Wall Street
Journal podcasts, I was startled to hear the narrator state that even
Warren Buffett had been wrong about his recent call on the stock
market. If you didn’t catch the reference, it was a response to Buffett’s op-ed in the New York Times on October 16,
in which he said that he is betting on American equities. I suppose
the point of the podcast was that the markets have been very volatile
and unpredictable over the last few months. Quite an insight. What’s
shocking to me is that Warren Buffett is undoubtedly the most
scrutinized investor in history. That is not hyperbole. There have
been other investors that have outperformed the market on a sustained
basis, and I’m not even suggesting that Buffett is the most successful
investor of all time. That’s impossible to determine. However, we’ve
never had the multitude of channels of information that we now have.
Despite the irony of it, given his lifestyle, he is indeed a celebrity
investor in a time of massive media access. The point of all this is
that most people who spend any time paying attention to the Buffett
investing philosophy know that he wasn’t calling an absolute market low
in October. He was simply acting on the belief that the market as a
whole was undervalued, and he was acting greedy in a time when others
were acting out of fear. Could it become more undervalued? Maybe.
Could it gain 20% the day after he decided to jump in? Perhaps.
Which, incidentally, would mean that he would have missed that upside
had he not been in the market, which is the whole point of his article.
Before I continue, let me point out that one doesn’t have to be a
Buffett observer to understand his perspective when he chose to buy
into the US stock market. His rationale wasn’t shrouded in
Greenspan-like rhetoric. To quote from the article: “Let me be
clear on one point: I can’t predict the short-term movements of the
stock market. I haven’t the faintest idea as to whether stocks will be
higher or lower a month — or a year — from now. What is likely,
however, is that the market will move higher, perhaps substantially so,
well before either sentiment or the economy turns up. So if you wait
for the robins, spring will be over.”
So why is this aggravating to me? I guess the real answer to that
is that the media is perpetuating a sentiment of fear that feeds a
cycle that can be dangerous to all of us. From a more applied
perspective, though, I think it causes people to act in a way that runs
counter to what is in their best interest. Without doubt, times are
tough. The question is, what are you going to do about it? That
brings us to the point of this post. The discussion on the podcast set
me to thinking about who is in a position to benefit from the current
economic and psychological environment. I’m not referring to what
companies or industries do well in a down market, or which hedge funds
are poised to reap the benefits of the fear that has swept
substantially all of our markets. I’m thinking more about
individuals. Many of us had a significant percentage of our assets in
the stock market heading into this mess. There are things we can do,
especially at year-end, to harvest tax losses and such (see your
financial advisor for help with this), but unless we’ve been sitting on
cash for the last year or so, our net worth has decreased, probably by
a lot. In Warren Buffett’s case, the pile of money to which he was
referring was in his own account, which is typically invested in
government bonds. In other words, he was sitting on a pile of money
that was not ravaged by the recent stock market decline. That’s nice
for Warren Buffett and his heirs, but who else is in a position to take
advantage of this situation?
Retirees are certainly the class that has been the hardest hit by
this. They have little opportunity to recover from an investment
standpoint, and in many cases can do nothing to enhance their income at
this point. As retirement tends to last a lot longer than it used to,
many retirees have had some exposure to the stock market, so they’ve
felt some pain.
People nearing retirement are in a position that is similar to
retirees, except that they may have a better chance to recover because
their time horizon may be a bit longer, and they generally will have
the option of working longer than they had planned. Not a great
scenario, but it’s good to have options.
Those of us who are in the accumulation period of our lives are better
poised to benefit from the current scenario. In general, we may have
been hit hard by the declines in our 401ks and the 529 plans we’ve set
up for our children’s education, but we’re also typically investing on
a consistent basis, which means we’re taking advantage of some
fantastic bargains at present. I know it doesn’t feel very good right
now, but people really do build wealth in times like these. The worst
thing we can do is put our money in cash equivalents or over-allocate
to fixed income. I will say that there are a lot of opportunities in
bonds right now as well as stocks, however, and you should discuss that
tradeoff with a financial advisor.
This brings me to group of individuals who I think are in the best
position to establish a firm financial foundation for the future in
this environment. I’m going to be specific, but pieces of this are
relevant those who share some attributes with the profile I’m
specifying. Young, dual income couples who are professionals and have
not owned a house are in the sweet spot to benefit from this crisis.
The housing market is down, and the government really wants you to
purchase a home. That is not a new concept; there are powerful tax
incentives for all homeowners. But if you’re willing to buy before
July 1, 2009, the federal government wants to give you an interest-free
loan of $7500. More on that later. In addition, you’ll have two
incomes to pay your bills, and you likely both have some sort of
defined contribution retirement plan to which you can contribute, i.e.
a 401k. Here’s the thing: as much as I’d appreciate you doing your
part for the economy and buying that $50k BMW because you just got a
big raise, don’t do it. Get a used Toyota and invest your money. It
will probably be a while until we see a better time to invest, and how
much happier will you really be with an expensive car? Likewise the
home electronics, etc. Think hard about the personal utility you’re
going to realize from the expenditures you make. I’m not suggesting
that your only concern should be building wealth, but I do believe that
you have a unique window of opportunity to maximize your investments
and establish a framework that can lead to financial freedom in your
future. There are some tremendous bargains in the stock market right
now. Ignore the news and invest aggressively with money you don’t need
in the short term.
As for housing, in most parts of the country there are many
opportunities for patient investors. Unfortunately, some of these
prizes come in the form of bank-owned properties that are the result of
somebody else’s misfortune. Regardless, the government wants to give
you an additional $7500 on top of a mortgage deduction to stop paying
rent and start building equity. I say…do it. You don’t have to buy
your dream house at 25 years old. If you’re savvy, you can buy a
relatively inexpensive home to live in for a few years, and it can then
become an investment property when you move on to something else. I
realize that $7500 is not a ton of money relative to home prices, but
it’s a boost, and it goes a lot farther today than it did 2-3 years
ago. With that said, let’s talk a bit about the high-level parameters
of this tax credit.
- It’s only available for first-time homebuyers, or those who have not owned anything for at least three years.
- The home must be, or have been, purchased between April 9, 2008 and July 1, 2009.
- If you’re single, your income must be below $75k for the full credit. If you’re married, combined income must fall below $150k.
- This is essentially a loan. You must pay it back, interest-free, over a 15 year period.
Of course, you shouldn’t over-extend yourself to purchase a home.
Keep your payments within 28% of your gross income. Again, that should
be much less problematic than it was a couple of years ago.
As I indicated earlier, if you share any attributes with the profile
I’ve described, you’re a candidate to benefit now from this crisis.
Without question, there is a lot of fear impacting the economy right
now, and it’s certainly not totally unfounded. It is, however, very
influential in terms of our overall economic health. If people are too
afraid to buy, companies don’t realize revenue, they have to lay off
workers, unemployment rises, and things just get worse. Today, the
risks we face in most markets (i.e. the stock market, the housing
market, the bond market) are significantly lower than they were a
couple of years ago, when prices were astronomical relative to the
intrinsic value of these assets. That’s a simple concept, but very
hard for most people to internalize. If you can do that, you stand to
build a strong financial foundation for your future.