Friday, January 6, 2012

The Roller Coaster

What your perspective on the likelihood of an economic/real estate recover is probably very indicative of the fact that you are a human being. When the markets are up 99% of people think it will NEVER go down. And when the markets are down most people think it will NEVER recover. But if you look at any graph of any market you'll see something very different. Extremely low prices ALWAYS eventually stimulate buying. And the momentum almost ALWAYS goes too far. And the cycle completes itself.

Human beings have a very very short and myopic memory. The fact of the matter is, if you use a financial model it is always very obvious where the market is. I use Capitalization Rates. When "cap rates" are high (i.e. prices are low) I can buy and hold and make money regardless of what the market does or how long it takes to recover. When cap rates are low and don't make any sense it is good time to sell but I don't have to sell - I still continue to profit from the day to day cash flow of the property. 

In the end, for most people though it is like riding a roller coaster. Most people only know where they have been and the visceral feeling of where they have been is their emotional governor and they literally have no choice but to yield to their feelings. A financial model is a "theory" and the visceral feeling of falling (or rising) is way more "real" and overrides good judgment. But you do not need an MBA from Harvard to know that it is a good idea to buy when yields are 20% plus and sell when prices are so high that the same asset is yielding 5%. Yet most people respond just the opposite because of the visceral effect.

Now lets see how you good your choices and thinking are. Time will definitely tell!


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