Stocks for the long run

I had a lunch conversation in April with a co-worker who is younger than I am and he asked "why are you not rich?" I assume by that, he meant "you're pretty good with saving money, are pretty knowledgeable about investing, and you've been working for quite a while, why are you not rich?" 

I didn't have an answer for him. But in the years that I have been around (by "around" I mean earning a salary, having to manage personal finance, and having the chance to observe others doing the same thing), I have noticed that folks who are good with managing money have certain intuitions that others lack. One of them is to avoid the temptation to chase after yesterday's returns.

Back in 1998-2000, the media was filled with stories about Americans selling their Range Rovers, raiding trust funds, and borrowing from margin accounts, to raise money to invest into technology stocks. Many of these investors lost their shirts when the law of average reasserted itself. Sadly, many Americans are today doing the exact same thing with real estate. 

Today's New York Times has an article pointing out that these real estate investors are on the wrong side of history:

"As the value of real estate has skyrocketed, owners have become enamored of the wealth their homes are creating, with many concluding that real estate is now a safer and better investment than stocks. It turns out, though, that the last five years - when homes in some hot markets like Manhattan and Las Vegas have outperformed stocks - has been a highly unusual period.

In fact, by a wide margin over time, stock prices have risen more quickly than home values, even on the East and West Coasts, where home values have appreciated most."

It's a smart move to be in the real estate market today in search for a residence for your family to live in. You will be saving rent, getting yourself a nice tax break, and diversifying your assets into the real estate market. But it is extremely foolish for someone to be in the market today in search for an investment.  In the past five years, rental rates in many areas (such as Chapel Hill) have remained the same while property prices have skyrocketed. If you are in such a market, the only way to justify such an investment is to assume a higher future property value.

A professor at UVA once said in class that the biggest gains in any equity market is to buy when everyone else is selling and to sell when everyone else is buying. If I had heeded his advice back in 1999, I'd have a lot more money today.