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Ignore the Headlines and Get Away From the Herd

March 6th, 2008 · No Comments

Today we had a bunch of bad news and at least one good news come out about the housing market. The good news was that the FHA loan limit has been increased to $327,750 for Orange County. The doom and gloom news was the Mortgage Bankers Association reporting that foreclosures hit an all time high with 8% of all American households delinquent on their mortgage. Also, the Fed reported for the first time ever since they started tracking debt in 1945 that the amount of debt tied up in homes exceeds the amount of equity homeowners have built up. It certainly sounds like the sky is falling in real estate or is it?

I recently ran across a TIME magazine article by Dan Kadlec entitled “Ignore the Headlines” making a case for buying now whether it’s real estate or stocks. He points out how legendary investors such as Peter Lynch and John D. Rockefeller profited from taking a contrarian view to popular opinion. I love the Rockefeller quote in this article in which he said, “The way to make money is to buy when blood is running in the streets”.

Personally, I’ve always enjoyed being a contrarian whether it be in my business or private life. Perhaps it’s a personality flaw of mine but it is what it is. You can’t argue against the success of Lynch or Rockefeller can you? One of my favorite investors, Warren Buffett, practices the same go against the grain philosophy. I love how humble this guy is.

People have proven throughout history to have an affinity to be herders. Just look back to the stock market crash in 2000 or the current housing bust. Companies were losing millions of dollars but it didn’t keep investors from following the herd throwing huge sums of money into companies that were completely worthless. Real estate speculators did the same thing and didn’t care that the cash flow generated couldn’t come close to covering their carrying costs because everyone was going to make huge fortunes overnight.

It was a gold rush of sorts and the exact same thing happened during the California Housing Boom in the 1880’s, the Florida Housing Boom in the 1920’s, and the housing boom in the 1980’s. In today’s connected society, the media plays an ever increasing role in facilitating this herding behavior. If you listened to the media and followed the stock market herd in 2000 or the housing market herd in 2006, I imagine your investments haven’t fared too well in the past decade.

I also remember the media predicting that the Florida real estate market to be in total ruins after the run of 3 hurricanes in 2003. Shortly thereafter, Florida went on to experience the greatest real estate boom ever. It just goes to show you that the news is in the business of selling news and not making economic forecasts.

I’m a strong believer in copying successful behavior and at least with investing, I think it pays to get away from the herd.

watch video: Analyzing Housing Data on CNBC

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How to Analyze Investment Properties
Trump and McKinney Say Buy Now and Bring Artistry into Real Estate

Tags: Market Statistics · Real Estate Tips