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Sunday, Nov 8, 2009
I live in Chicago, and if this housing burst means plans for yet additional greedy developers'condo bloat are about to be cancelled, then there's a silver lining!
Andrew Leonard, I expect better from you. I read your column on a regular basis because you have a gift for clarifying a complex issue that keeps the essential underlying structure intact.
Your betting metaphor, however, is otiose. Betting is considered by some to be a distasteful activity, and it serves no direct purpose for the players or teams in the competition. Barry Bonds is not made stronger, faster, or more accurate because I bet my mother a twenty on the date of his record-breaking home run.
Investing is, on the other hand, a huge part of why we are economically successful as a country. The purchase of treasury bonds is an act of economic patriotism, and corporate IPOs and bonds directly fund their economic activity - the influx of cash allows a company to fund a startup, expand to new sectors or buy out a weaker competitor.
There is no industrial revolution without the concept of distributed ownership. And the distribution of risk is the foundation of pension funds, social security, health care, and any other version of insurance. The principal actors in your morality play are not unscrupulous people that have base gambling addictions; they are institutions that exist to pay for your bypass surgery, send your child to college, and rebuild your house after a flood.
In your haste, you missed what I think is an important facet of this panic. There are a lot of banks and funds left holding billions of dollars in CDOs. There is no standardized market for the sale of these derivatives, so their sale is difficult and decentralized. In the flush of catastrophe, the many current owners are forced to sell a lot of difficult-to-sell CDOs into a declining market. This, to quote The Economist is the fastest way to lose money yet invented.
The real panic is that no one knows what the CDOs are really worth, but the panic will undoubtedly overshoot the bottom of this market and there will be a lot of money made by buying them back.
But you're just flat wrong on this one. There is a distinction between betting and investing, and that distinction is time.
Buying a stock you know nothing about based on a tip from a friend? Betting. Day trading? Betting. Junk bonds? Betting. Hedge funds? Betting? Putting your money in the market? Investing.
Historically, the stock market (which has been in place for well over a century now) has paid investors an average of about 10% a year. That is, if you put your money there and LEAVE it there. Long term, the fluxuations of the market don't matter because over time it's all corrected. Any financial planner worth a damn will advise that if you don't need your money for at least five years (ten is better) to put it in the market where your money will work for you. This is AFTER you have a chunk of money set aside for emergencies sitting in something boring and safe, like a money market account.
Index funds are your best bet, no pun intended. Low expense ratios, minimal movement of your money, and safe:
http://www.fool.com/mutualfunds/indexfunds/indexfunds01.htm?source=LN
Where do you think your money goes when you are "Buying a stock you know nothing about based on a tip from a friend? ... Day trading? ... [using] Junk bonds? ... [using] Hedge funds"
When you do any of those things you are "Putting your money in the market" yet you label that last one "investing" and the others "betting". Investing IS betting, how safe the bet is is the only distinction there. You call the safest bet "Investing" and the riskier ones "betting". They're all just different points on the same scale.
I would say that you're "investing" when you research a company, believe it can use your money well and wisely and buy its stock (or bonds or make use of another transaction). That's still betting, but at least there the intention is slightly different than a mere weighing of risk. Anything else is a bet through and through.
I went through the process of buying a house during the height of the boom, and I think it is unfair to label many of the victims (the people losing their homes) as greedy or stupid. When I started looking (with no chance of putting together a down payment for 5 years or so) for houses, I stepped into a strange and surreal world of extremely friendly people who gave me, even then, a sense of doom. The day I walked into a real estate agent's office, she told me that I could get a loan with 0% down, and then she took me to her friend, a lender. He looked at my assets (I owned nothing except a 25 year old car--I had just left grad school) and said that I could buy a house in a range that left me breathless. I mentioned that I was not a US citizen nor a resident alien (I was in the US on a legal working permit), and they told me that in the US anyone can buy a house. I mentioned that I was single and that I had no guarantees that the job that brought me to the area would last, and they assured me that I could sell in a year if needed. In tandem with the lender, the agent took me to houses that were palatial (in my opinion)--they were gorgeous homes with numbers of bedrooms that a single woman with two cats would have no need for. When I mentioned that I did not feel comfortable buying a home that would lock in 60-70% of my monthly income, they offered ARMs and 40, even 50, year mortgages. The way these offers and alternatives was offered to me, it was almost impossible to NOT dream of owning one of the palatial homes. These lenders (and agent and the entire system) did not give me facts, they offered expertise (they were experts and I didn't even know what equity really meant), knowledge, and, worst of all, the possibility of security. To a single woman, the security of making a sure bet investment (this is the day and age of Enron) was intoxicating.
However, perversely, after living in a 420 sq. feet studio for several years during my grad years and after experiencing poverty (as a foreign student I couldn't get loans, which made me very wary of these easy housing mortgages), I felt that something wasn't right. I settled on a modest house (40% of my income)--to the absolute horror of the agent and the lender (horror expressed to me many times and once the lender even got annoyed with me and told me that I could get more equity with a more expensive home, which didn't make sense, as I pointed out to him because i would be spending more in interest--with a fixed interest rate.
My point is that unless you bought a home during the housing boom and unless you are one of "those people" these bastards targeted (single, young, foreign, poor, uneducated about finances--anyone who has been marginalized), you cannot throw stones at us. I had my experiences as a grad student to rely on as well as a sense of insecurity after 9/11 when so many foreigners were targeted. If I had not been told by the business offices where I did my studies that foreign students are not eligible for loans, period, and if I had not felt that my time in the US may be impermanent, I very well would have gone for the palatial home, NOT because I am stupid, but because the system these used car salesmen had created.
These lenders need to be targeted. And someone needs to step in HELP the people who are in danger of foreclosure. I am in a good place, and even with house prices plummeting, I can still make a bit of a profit if I decide to/can sell. However, around me, in my subdivision, there are houses that are foreclosing and my heart goes out to them. This is not about money and the market. This is about human beings.
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