In the not too recent past it was the Cold War in general and Russia in particular that was the primary worry of many Americans. Back in the day we could hide in bomb shelters. Today it seems that there are too many worries to count and nowhere to hide anymore, whether it’s around this country or around the world. On the one hand it seems that on average we have this sense that something is going to happen that will be bad. On the other we think like an attorney friend of mine who asked me what I thought of the stock market. I said, “Well I have a point of view, but you go first.” She said, “I really don’t know anything about stocks, including the ones I own, I just listen to the news and repeat what I heard.” Well that was unabashedly honest. In fact, it is my opinion that more often than not, that’s how most of us roll. We don’t do our homework. We just read the headlines and repeat what we read or heard. Then there are those of us who say something like another attorney friend who boasted over lunch. “I’ve been an attorney for 40 years and involved in real estate transactions for 33 years. Let me tell you, I have seen everything.” To which I replied, “Do you want to bet? You haven’t seen anything my friend. You see, that was the best of times.” Let me explain.
“Risk, is not knowing what you are doing.” – Warren Buffett
Let’s take the time to look at history. Not just your life history, but U.S. history. On December 18, 2011, Tom DeGrace (no relation) at www.stockpickssytem.com wrote, “The housing market crash of 2007 was the worst crash in U.S. history. The housing market crash of 2007 was the cause of the financial crisis. This nearly caused the U.S. to experience another depression like the Great Depression.”
I believe we can learn from history so that we don’t have to be doomed to repeat it. That is, when we pay attention. According to the S&P/Case-Shiller National House Price Index from 2006-12 the fall nationally has been about 34 percent. As Alex Pollock observed on April 19, 2012 at The American the drop is “in nominal terms, but that’s a lot. But since inflation has continued, the fall in real terms is even bigger. Adjusting for Consumer Price Index inflation, the drop in house prices since the peak has been 41 percent. There’s a number nobody predicted!”
Source: S&P/Case-Shiller-Home Price Index, April 19, 2012
That’s what happened to your Il-liquid investments. About the same time, when it comes to stocks, according to Wikipedia, “The U.S. bear market of 2007-2009 was a 17 month bear market that lasted from October 9, 2007 (the day after the election) to March 9, 2009, during the financial crisis of 2007-09. The S&P 500 lost approximately 50% of its value, but the duration of this bear market was just below average due to extraordinary interventions by governments and central banks to prop up the stock market.” (Italics added.)
Markets always rebound. But it may not matter much if you need the money.
So if there are two sets of numbers that nobody predicted to happen about the same time from your recent history, suppose it happens again. Only the next time is worse. Something along the lines of what happened in the Great Depression. According to theoretical physicist, Professor Michio Kaku, Ph.D., at a 2014 conference before financial advisors in New Orleans, “Depressions seem to happen about every 80 years or so.” In chatting with Dr. Kaku I learned that the U.S. was right on track for a depression to occur in 2008, but the can got kicked down the road. Here’s what we can learn from Great Depression 1.
“Using new data on market-based transactions we construct real estate price indexes for Manhattan between 1920 and 1939. During the 1920s prices reached their highest level in the third quarter of 1929 before falling by 67% at the end of 1932 and hovering around that value for most of the Great Depression. The value of high-end properties strongly co-moved with the stock market between 1929 and 1932. A typical property bought in 1920 would have retained only 56% of its initial value in nominal terms two decades later,” says Tom Nicholas and Anna Scherbina , in a 2012 paper, at American Real Estate and Urban Economics Assoc. Manhattan, like other major cities, has been a highly desirable location. It’s all about location, location, location, right. Or is that always the case, no matter what? The pair go on to say, “Our indexes reveal that prices for a typical property reached a local peak in 1926. They then fell and rebounded to reach their highest peak in 1929, coincidently with the high point of the late 1920s stock market run-up. From then prices fell to a new low by 1932, and they did not recover for the remainder of the 1930s. We show that high-value properties were more likely to be synchronized with the stock market between 1929 and 1932 but that overall returns to real estate during the 1920s and 1930s were low. That is, real estate was much slower to rebound than the stock market.”
On March 26, 2008, Harold Bierman, Jr., Cornell University, “The 1929 Stock Market Crash” wrote, “The 1929 stock market crash is conventionally said to have occurred on Thursday the 24th and Tuesday the 29th of October. These two dates have been dubbed ‘Black Thursday’ and ‘Black Tuesday,’ respectively. By all accounts, there was a selling panic. By the time the crash was completed in 1932, following an unprecedented large economic depression, stocks had lost 90 percent of their value.”
Regret is like quilt. They are the only gifts that keep on giving.
You cannot imagine how you would feel if you woke up to a real estate loss of 67 percent on top of a stock market loss of 90%. My bet is that you would have great regret, perhaps for life. Especially if losses like these were to occur at the same time when that money you thought you had was going to available to buy food. Please answer this question. How prepared are you for the good, the bad, and the unforeseen? Get ready. Instead of being a participant, you may prefer to be a spectator the next time.
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