Friday, July 11, 2008

Old Advice on buying

As we watch the markets go into epileptic seizures, its sometimes a good time to remember the sage advice on when to buy. Now, I'm very focused on buying a home to *live* in, so all of this advice is geared towards that, but could equally well apply to stocks or bonds. Note: Its not time yet to buy any of them. We have to get through 2009 at a minimum. I personally think we'll inflate our way out of this, so invest as you see fit.

The best advice I've been given:

1. "Be fearful when others are greedy and greedy when others are fearful." Warren E Buffett. My comment: I have a few coworkers who screamed "buy now or be priced out forever." In a way, they are perfect investment emotional indicators. Remember, the lowest home prices are during the transition from Despondency (emotion #11) to Depression (emotion #12). We're in mid-Desperation (emotion #8). I do think the people buying now are emotional knife catchers. To buy before Capitulation (emotion #10) is just silly. Note: Some bloggers thing we're only in Fear (emotion #7).
My last emotions article remains current.

2. And also from the Oracle of Omaha: " Price is what you pay, value is what you get". With that is his "Margin of safety." My translation: Never pay value, always assume you've overvalued the asset. If you cannot buy at a discount to par, wait or move on.

3. Buy what you know. This is from a book called The richest man in Babylon I haven't read the newer edition, but I think the old edition is the best seven Americanos you'll ever part with. In Real estate, it means to research the areas you're going to buy long before you buy. I like to compare areas as a start.

I also think for real estate novices (not the bubble bloggers on year 3+), that the book Home buying for dummies. Me being me... I also read home selling for dummies. :) (Bwaaaahaaaaahaaaaaha!)

4. Buy when its tough to get a mortgage. I first heard this from my grandfather; its old sage advice. For when its tough to get a mortgage, you just do not have to deal with all of those pesky emotional investors. They seem to be afraid of the paperwork. This is when you have negotiating leverage. Note: Its not tough to get a mortgage by historical standards. By 2010... I think it will be tough to get a mortgage.

5. "Its better to buy a year late than a year early." This is also some old advice. Since its been told to me for decades, I'm not sure who to credit with this advice. The last year of a downturn might see prices drop 5%. The first year of an up-tick generally sees a 3% increase. If you're socking the money away, whip out a spreadsheet and figure out how your life would be better waiting. Play with interest rates, down payments, savings rates, unexpected expenses, etc.

Where I want to buy, I still come out ahead renting over buying. There is no reasonable scenario, at today's prices, where buying is wiser. After 30 years, assuming reasonable home appreciation rates, wage inflation, investment returns, and such you will see that your lifestyle is ahead renting (for now). Some areas this isn't true anymore. (e.g., Palmdale CA). But is it time to buy there? I think in six months it will be even better. See point #5. ;)

Note: The book reference in point #3 recommends buying your house. I agree. But that book was also written prior to Florida 1925/1926. ;) It was written back when 50% down and a 10-year mortgage were typical too, so wild real estate speculation was less common. (But somehow it missed the 1849 San Diego bubble... hmmm... Hey, its a short book! Very worth the read.)

And if you get all of your investment advice off the internet... I think you're being foolish. My recommendation is to read and understand. Be a wise investor. Do not invest off what I say. Rather, invest when you know you're ready. Step #1, get ready. :) (Save a down payment, know what you can afford, know where you would like to buy and pick alternatives!) Basically, read the books I've recommended. Their advice is pretty good.

Got Popcorn?

1 comment:

The Anonymous said...

Good advice Neil...your best post in a while.