My son’s former landlord is out $50,000 – for not facing reality.
Early in the year, my son tried to buy his Austin rental home from his landlord for $650,000, with no commissions. It was far more than the landlord ever could have netted if he put the home on the market, and my son illuminated that with an elaborate comparable sales analysis on a spreadsheet.
His landlord, however, insisted the property was worth $100,000 more, despite zero comps to support the number. The landlord had purchased the house for a song and a prayer prior to COVID, so he still would have had a tremendous return at $650,000. But he was still clinging to COVID-appreciation-hysteria and convinced he could get more.
So, my son promptly moved out and bought elsewhere, while his landlord fixed up and listed the house – and it is still unsold and vacant. Between improvement costs and lost rent, the landlord will be out at least $50,000.
In this blog – I Watched A Billionaire Lose Everything – I talked about a dotcom billionaire I knew who lost everything because he wanted to be a multi-billionaire instead of a mere billionaire; he refused to sell his holdings, convinced they’d go to the moon when they instead went into the ground. Meanwhile, his non-greedy ex-wife sold all the stock she got in their divorce and remains filthy rich to this day.
Interestingly, I was in the Bay Area during the dotcom era, and I watched many dotcommers refuse to sell any of their stock (because they wanted to get even wealthier) when they could have made millions, only to end up broke after the dotcom crash.
We are seeing investors caught up in similar momentum investing and holding right now with AI-related stocks and crypto (“I am up 22% YTD; no way am I selling!”)
What Fostered Irrational Expectations? (A 40-Year Recency Bias)
Dave Collum is an eccentric chemistry teacher at Cornell who loves to opine on financial assets. He points out that the perspective of investors of all stripes has been severely warped by the last 40 years, when interest rates slowly but surely fell every year until they approached 0% during COVID.
His point is that falling rates almost always push up asset prices, even if GDP does not go up. He further points out that rates can’t drop forever, particularly when they are already very low – making it very unlikely that assets will continue to appreciate in the same manner.
Collum says we all have a “40-year recency bias” and now expect irrational returns. If, however, we all looked back a full 120 years, our perspective would be much different. Collum reminds us that Warren Buffett also makes similar observations about falling rates driving asset values.
Renowned Investors Often Sell Way Too Early
Bernard Baruch was a renowned early 20th-century investor who famously said, “I made my money by selling too soon,” emphasizing a strategy of securing profits early to avoid market downturns. The renowned fund manager, Peter Lynch, was also famous for often selling long before gains maximized – but somehow he too ended up filthy rich and enormously respected.
Similarly, Warren Buffett always seems to exit markets years too early. He, in fact, pulled multiple billions out of the market years ago, missing substantial additional returns and leaving billions on the table. But, somehow, he too gets by.
And lastly, every time the famous investor Jim Rogers gets interviewed, he jokes continuously about all of the times he exited his positions far too soon – and he too remains filthy rich.
My Point?
There are a huge number of home-sellers in the market or coming to market who have expectations every bit as irrational as my son’s landlord – and they might be wise to remember the lessons of the above super-investors.
Or, they can just remember the old adage: pigs get fat, hogs get slaughtered.
When homeowners (and asset holders in general) try to maximize gains and time the top, they often end up worse off than they would have if they had simply accepted reality and taken any gains they could get.
