Investor Education
Real estate is an alternative investment that allows investors to diversify their portfolios away from equities, bonds, and cash. Contrary to popular belief, there are many different options for investors to put their capital into places that are not physical properties. Real estate can include these physical properties such as land, residential homes, and commercial properties. Owners of these properties have benefits such as cash flow from rentals or leasing the properties, capital appreciation of the asset, and tax benefits from being able to write off certain expenses with these assets.
Read our feature on Real Estate here!
The Train of Error
Markets had another choppy week. The Dow—highlighted by a Thursday intraday move from down 500 points to close up over 800 points—ended up slightly over 1% on the week. The S&P 500, on the other hand, fell a little over 1.5%, and the Nasdaq fell over 3%. Another week of Up and Down.
After the 2008-2009 Financial Crisis, stock markets seemed to go one way: Up. Not all the time. But most of the time. And any downturns proved to be short-lived.
With the Covid lockdowns in 2020, that seemed like it may come to an end.
But then it didn’t.
Governments and central bankers threw money around. The downturn in markets was temporary. And Twitter personalities claimed that investing was easy, at least for a while (see this video for Exhibit A if you don’t mind colorful language).
It seemed, again, that stocks only went up.
But markets and cycles don’t work that way. Good times form the basis for the bad times, which form the basis—often in the form of low prices—for more eventual good times. As James Grant wrote in his book The Trouble With Prosperity:
Of all the consequences of sustained prosperity, none is so powerful as the delusion that markets always go up. They do not always go up. Equally (as is often forgotten during bear markets), they do not always go down.
In markets, almost no truth is permanently valid, and today’s heresy may be counted as even money to become tomorrow’s orthodoxy.
When things like low interest rates and central bank support have been going in one direction for a while, people tend to assume they’ll go on in that direction for nearly forever. And they often act on that assumption with leverage, as we’ve seen recently with U.K. pension plans. Commenting on that incident, JPMorgan CEO Jamie Dimon hinted that there may be surprises at hand in the near future:
I was surprised to see how much leverage there was in some of those pension plans. My experience in life has been when you have things like what we’re going through today, there are going to be other surprises.
Be ready for surprises. Bear markets arise to put previous errors in their places and clear the way for new mistakes. Returning to James Grant to end this section, from the book mentioned above, which he wrote in the mid-1990s:
Cycles in markets are inevitable, irrepressible, and indispensable. Even if some all-knowing central bank could create a state of economic perfection—measuring out growth in ideal, non-inflationary doses, neither too much nor too little—human beings would respond by overpaying for stocks and bonds. In this way they would restore imperfection.
Bidding up the prices of financial assets, people would not stop until they had overvalued them. In consequence, the marginal business would find the means to finance the extra, gratuitous capital project (and the marginal consumer to pay for the items thereby produced). Redundant products and services would tumble into the world’s marketplace. Before very long, the marginal rate of return on invested capital would fall short of even the low expectations of the average bull-market investor. The extra, uncommitted dollar would seek safe harbor in a bank account instead of a mutual fund. At this moment, if not before, the boom would fall down in a heap. The function of bear markets and cyclical downturns, as we have seen, is to cut short the train of error.
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