Lazy Man and Money

Lazy Man’s Market Minute Update #1

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While every other blogger is writing year-end recaps, I’m taking a minute to do something new and different. I’m in the phase of my life where I typically make more from investing than I do from all my side and freelance gigs.

While it’s best to invest over time, there may be specific times when investing in one asset vs. another asset is better. The winning formula is to buy low and sell high.

Stock Market Outlook

Predicting the stock market accurately is impossible. However, it is possible to know when to buy/sell stocks based on when the markets are cheap or expensive. When the stock market is cheap, I buy stocks. When the stock market is expensive, I look for cheaper investments such as bonds or housing. It’s worked out well for me.

I determine if the markets are expensive or cheap by looking at the Shiller P/E. The Shiller P/E is an evaluation that I cover in more detail in the link in the previous paragraph. Since the mid-1990s, the Shiller P/E average has been around 26-28. It was a low of 15 in the crash of 2009 – a fantastic time to buy. The Shiller P/E reached a high of 44 in the dot-com boom – the best time to sell. Before the stock market’s drop this year, the metric was around the 37-38 range – a sign that it would be an excellent time to sell.

I would never sell all my stocks when the market is high. Instead, I adjust my asset allocation to be more conservative. I also focus more on “value” stocks like consumer staples that people need to buy no matter what.

Current Stock Market: Shiller P/E: 28 (Medium)

It’s a great time to stay the course. Nothing seems particularly cheap or expensive.

Housing Market Outlook

Several months ago, I detailed when to buy and sell real estate. The key is to use the NAHB/Wells Fargo Housing Market Index. It’s rated on a scale of 1 to 100. A rating of 1 means that the housing market is low, and a rating of 100 means it is high. When the HMI is low, it’s good to buy. When it is high, it’s a good time to sell.

The year started with an HMI of 83 (a strong indicator to sell).

Current Housing Market: HMI: 31 (Cheap)

This HMI number indicates it is a very good time to buy. However, keep in mind that interest rates are high. You may need to pay a lot now, and hope that you can refinance to a cheaper rate in the future. Also, real estate is particular to the property you are buying. You may be able to find a great value in an expensive market or a poor value in a cheap market.

Final Thoughts

These indicators shouldn’t be signs to make any rash financial decisions. They are important indicators for me, and I share them with the hope that they’ll be helpful to you.

Stocks vs. Real Estate

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Back in 2007, I covered an article in Money Magazine that was interesting to me – Stocks vs. Real Estate. It’s fifteen years later now, and I thought it was worth revisiting now that we sold an investment property. Now it’s time to invest that money in the stock market.

Before I get to that new stuff, let’s review what Money Magazine and 2007 Lazy Man thoughts were:

May’s Money Magazine tries to answer the Stocks vs. Real Estate question. I had thought that real estate would come out as the big winner. I know that real estate has been trendy of late, but I had it as the favorite due to the value of leverage.

Money Magazine declared stocks the winner, but I think they glossed over the leverage factor. For one, they took a two-year timeline for the real estate and deducted many one-time costs. That didn’t seem fair to me. So to the right, you’ll see my attempt at running the numbers in my spreadsheet.

For this example, I assume the investor has $40K to put to work. I assume a 10% (for better or worse) gain for stock picks. I also took a cue from my early physics classes and ignored friction – in this case; it’s the cost of buying stocks. The “Real Estate” column assumes the investor puts 20% down, allowing them to buy a $200K home and pays 10K in closing costs (closing costs from the article). The “Real Estate AC (after costs)” factors in a 6% sales commission (though I believe this can be less), paying off the mortgage, $3,600 in preparing the house for the sale (sourced from Money Magazine), plus the original 40K investment.

I’m not sure that my chart is accurate. I’ve edited it several times, realizing a couple of errors. However, each of the charts showed the same trend. Real estate seems to outperform in the short term, but at some point in the 25-30 year mark, the 10% return of stocks takes over the leverage of real estate. However, if one were to lock in real estate gains at year 8 (around $125K), the person could use the profits to buy three more $200K homes, getting more and more leverage. Leverage can be dangerous as a loss can spiral just as much in the negative direction. Nonetheless, it still makes me think that there are a lot of general gains in real estate.

If you plan to go this route, remember that it’s not a get-rich-quick scheme. In today’s real estate market, I believe you should be prepared to hold onto a home for a minimum of 6 years (while being prepared to hold for ten years). Trying to fix up and flip a home within a year opens you up to short-term price pressures and fixed costs. You should also be aware of other factors mentioned in the Money Magazine article apply. One important thing to remember is that a home is not a very diverse investment. Another is that real estate investing takes a lot of work while investing in stocks is relatively quick and easy.

That was the whole article. I miss the pithy 2007 style of blogging. For the most part, it seems to stand-up well today. Of course, it might be more challenging to buy a $200,000 home than it was back then.

With fifteen years of wisdom, I’d say I should have put more attention into the last few lines of that article.

  1. Investment property is NOT a diverse investment
    There are ways to make investing in real estate more diversified. You can buy a REIT, which trades like a stock. Or you can do crowdfunded real estate like Crowdstreet and Fundrise. Those weren’t around in 2007.

    We all know what happened in the next 12-24 after I wrote that in 2007. The market crashed, and the property I bought for around $275,000 suddenly became worth $175,000. It took years for it to recover. In 2012, we purchased another property for $95,000 and sold it for $200,000. We used that money and did a 1031 exchange into another property now worth $300,000.

    One condo lost nearly a hundred thousand in a few years. Another gained a couple hundred thousand in a decade. Those are extreme examples, but they are two of the properties we owned.

  2. Owning stocks is a LOT easier than managing a rental property
    About 97% of the time, managing a rental property is easy. It’s the other 3% that’s tough.

    The real estate approach is more difficult, but I feel that you have more control over the results. I’d like my kids to have the life skills to be able to fix up an old dump and flip it for profit. I never learned those skills, making being a landlord more difficult. My friend, Carl at 1500days.com has executed some excellent live-in home flipping profits. It’s amazing to take one of your biggest expenses (your home) and turn it into a profit.

Let’s take the case of the property we just sold. We sold the property for $385,000 – close to the Zillow Zestimate. The Zillow Zestimate said that we should be able to get $2375/mo. in rent. We would need to do some updates, but that’s a reasonable number. That’s an annual income number of $28,500. Let’s assume that there was no mortgage on the property. All we have for expenses are property tax, insurance, condo fee, and maintenance. If it wasn’t a condo the condo fee and maintenance would be combined. All those numbers add up very close to $1,000 – so we’ll keep things simple and say that expenses are $12,000 a year.

The profit on a $385,000 investment is $16,500 or about 4.2%. That’s not a great return. It’s better than I can get with most dividend stocks, but the stock market usually grows more than 4.2%, and I don’t need to be a landlord. While I never ran these numbers specifically when I sold, I knew I wasn’t getting great value. Our situation was a little more complicated because we still had a mortgage, so our monthly gain was building the equity towards owning 100% of that $385,000 property.

There are likely better properties out there that would return more. Perhaps there’s a property that’s $250,000 and rents for $2,000, making the numbers more favorable for investors.

I think it’s hard (maybe impossible) to answer the stocks vs. real estate question because the specific details matter. If you do real estate poorly (pay too much, can’t maintain the property, pick lousy tenants, etc.), you would be better off with some index funds. If you can do real estate right (live-in flip, buy at a low market, have a tremendous price-to-rent ratio, etc.), it will probably beat the stock market. And it should, especially if you are putting in the extra work.

I’m left with the same conclusion that I had before. It seems that real estate is great if you are young and can put in the work. As you get older, maybe it’s best to cash out the equity and let the passive income from the stock market work its magic.

(Original version of this article published on: Apr 19, 2007 at 05:55)

The Three Tinas of COVID

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How many Tinas do you have in your life? I have a couple in real life, but I hadn’t had much interaction with them due to COVID-19. Instead, they’ve been replaced by three new Tinas. Two, I will briefly mention, but the third Tina is what we are all here to focus on today.

Giratina

Tina

Giratina is one of almost a thousand Pokemon. The kids love Pokemon. We recently watched a movie starting this character. It’s one of the more important Pokemon in their Pokemon Go games.

Each Pokemon has its own brief description and fittingly, Giratina’s is, “This Pokémon is said to live in a world on the reverse side of ours, where common knowledge is distorted and strange.”

Tina Rex

Sometime during COVID (no one knows the timing for sure because time ceased to exist), Cartoon Network inked a deal to show one million episodes of The Amazing World of Gumball. That last fact is probably not true, but it would seem true if you had kids who were a fan of the network as they grew out of Nickelodeon, PBS, and Disney.

Tina Rex, a Tyrannosaurus Rex, is a side character in the show. She’s the school’s bully.

You didn’t come here to read about cartoon Tinas. You (hopefully) didn’t even come here to read about bullying or living in a world where common knowledge is distorted and strange. We’ve got enough of that in 2020, right?

Maybe you’ll be more interested in my investing friend, TINA:

There Is No Alternative

While “There Is No Alternative” can be used in many different contexts, it’s often been used in the investing markets.

Loosely, it means that one has to deal with a sub-optimal asset allocation of investing because other investments aren’t very viable or unappealing. For example, putting money in a savings bank for a number of years hasn’t paid very much interest. Many 2-year Certificate of Deposit rates earn about 0.75%. That’s far less than the typical annual inflation.

Interest rates in bonds are down too. My go-to bond fund is the Vanguard ETF (BND). It’s paying a 1.16% SEC yield. I don’t completely understand the bond markets, but from what I do understand it seems like a very bad time for them as well.

You can look at alternative investments. Gold is up 27% this year. It’s close or at its all-time highs. Bitcoin is also close or at all-time highs. Real estate may be an option, but buying physical houses is competitive with all-time low mortgage rates. REITs (Real Estate Investment Trusts) may be better, but I’m worried about the long-term effect of the lockdown. It’s not an easy time to be asking people or businesses to pay their rent on time.

You could invest in commodities. However, earlier this year the value of oil went negative. It cost more to store oil than get someone to buy it from you to use it. It’s still a messy situation and will probably continue to be one until travel picks up.

That leaves stocks. The S&P 500 is hitting new highs. Markets internationally are doing well too. Everything almost seems to be at highs. There are some stocks that are still in difficult shape. For example, airlines and cruise ships are notably not doing well. However, they aren’t doing as bad as they used to be. Many have anticipated travel to ramp up around the middle of 2021 with better weather, vaccines, and leaders looking to take charge.

As I look at my portfolio, I see a true TINA situation. I have investment games of 20% this year, which has been compounding on investment games from the previous 10 years. I want to be more conservative because these markets scare me. However, it’s hard for me to go to investments with so little upside.

I look at the markets like it’s a Magic Eye poster waiting for the perfect answer to appear. The closest I’ve come are the solutions in my recent article about income investing. I’ve been steadily moving more investments more to dividend funds. For now, that’s about the best I can do to feel a little safer. Other people may find paying off their mortgages to produce a better return. A rational person would tell me to stop looking at the markets and my portfolio and do something to bring in more money. (So far efforts to bring in more money haven’t worked out very well.)

Is anyone else looking at their investments and thinking, “Where do we go from here?”

P.S. I should have mentioned this TINA I love, but it didn’t fit with the article.

Rebalance Time? Some Thoughts on Where to Invest Now.

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balance

Each day I look at how the stock market and my portfolio is doing in my Google Finance Spreadsheet. I know it’s not a healthy behavior, but I can’t resist. For a few minutes the amount of green or red does change my mood. Ugh!

However, sometimes I notice trends in the stocks and index funds that I follow. That is extremely helpful a few times a year.

One of the recent times I noticed a trend was a week or two ago. I noticed that my SodaStream stock had gone through the roof. I did a quick look at the news and it turns out that Pepsi is buying the company at a great premium. Yay!

I’m not interested in owning Pepsi stock. Fortunately, since my SodaStream investment was in a retirement account, I could sell it without tax ramifications. That’s just what I did.

If it had happened a month or two ago, I wouldn’t know what to do with the money. I would have left it as cash and wait for the next buying opportunity. It’s not a couple of months ago, and I currently had a few buying opportunity ideas already on my mind.

Before I get into those ideas, I want to address the obvious. Odds are, you didn’t invest in SodaStream. However, you may still also have some cash to invest.

Perhaps more likely, you have investments in some US stock indexes such as the S&P 500 or the Wilshire 5000. I’ve noticed that the stocks keep hitting new highs day after day. That’s great… Go USA! However, I’ve always been worried that my money is too reliant on the United States. We already have a very large real estate investment here. To make it worse, the United States is central to our main sources of income.

The single biggest point of failure in our diversification is the United States. I like the idea of having money spread all over the world. The best way I know how to do that is to buy more foreign stocks. If you have a similar belief, you might find that you need to rebalance your positions as the foreign stocks are now likely significantly less than the US stocks.

With that as a stepping stone, let’s get started on:

Some Investment Ideas for Right Now

Remember the investing mantra of “Buy low, sell high?” If the United States indexes (or in my case, some event like SodaStream) is high, I look for things that I can buy low. I prefer index funds as they are less likely to have some kind of Enron-like scandal that few people saw coming. (Yet, I still invest in some individual companies, like SodaStream. I never promised that I made sense.) I’ve got three ideas that fit the bill. (I generally prefer ETFs and Vanguard funds when possible due to low expense ratios. Full disclosure: I own all three of these index funds.)

  1. Emerging Markets (Ticker: VWO) – You may have noticed that emerging markets have been on fire lately… unfortunately it’s been a dumpster fire. It feels like they are down 5-6% in just the last week. It’s trading at just around its 52-week low and off 20% from its 52-week high. There’s a lot going around the world that explains it, which I won’t get into here. Things may get worse before they get better. However, over the long haul, I believe that these countries have a greater opportunity to grow as the world becomes more connected. I poured all the money from the SodaStream sale into this index.
  2. Frontier Markets (Ticker: FM) – You almost never see anything written about frontier funds, except for my article on them of course. The countries in frontier funds are very small, so small that they don’t even qualify to be emerging. Here are some example countries: Kuwait, Vietnam, Romania, Nigeria, and Qatar. One of the top 10 holdings seems to be the Bank of Transilvania. As we all know if you default on a loan to the Bank of Transilvania, they send Dracula after you.

    Some people will probably call frontier markets gambling, but again, it’s fairly diversified. I wouldn’t make it a big part of a portfolio, but it is worth considering. Like emerging markets, FM is trading near its 52-week low, but off nearly 25% from it’s 52-week high.

  3. Solar Power (Ticker: TAN) – Who loves cancer-causing tanning beds? Not me. Fortunately, this TAN is about investing in solar power companies. I don’t know if too many people doubt that solar is the future. I’m starting to see it everywhere… even on my own home’s roof. It’s trading close to its 52-week low, and off more than 20% from its 52-week high.

Finally, I had one final investment idea that I hesitated to share. I really haven’t looked into the company in great detail, so you’d definitely need to do your own research. It looks like SnapChat (SNAP) is below $10 for the first time in its existence. I do know that they’ve had some horrible earnings in the past, so maybe it is well deserved. However, I know all the kids love the company, and maybe a 12.5 billion valuation is low. I’m really on the fence about this one though, so take caution. I could see Snapchat going away before something like solar power or Transilvania. Full disclosure: I got a few free shares from Robinhood’s free stock promotion.

At the end of day, it’s up to you to manage your money as you see fit. I’m hoping that over the 20-30 years that I plan to keep this money invested, there’s going to be better than average growth than if I just stuck with the United States. If not, I do sleep a little better knowing that my investments are diversified (and backed by Dracula).

Time to Pull Out of the Market?

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Over the last couple months, I’ve noticed a bit of a change in the articles in Money Magazine and Kiplinger’s. They’ve started to be more proactive in warning people about planning for an upcoming bear market.

And you know what? I understand why and agree with it.

Here are some of the red flags I’ve seen cited:

  • Seventh Year of a Bull Market – We are in the seventh year of a bull market and they rarely last that long. It’s not that we are “due” for a bear market, but… well yeah I’ll say it, “We are due for a bear market.” Why? Because…
  • The Market Looks Expensive – Last June I asked if it was Time to Sell Your Stocks?… which should cast doubt on the validity of me asking the same question in the title today. If you read that article, you’d know about Shiller P/E and how a number over 25 seems to lead to crashes. Last year it was just over 25… now it is 27.42, which is what it was before the 2008-2009 crash. However, crashes typically need catalysts, so…
  • Interest Rates Rising Soon – It seems that everyone agrees that the Fed is going to start raising interest rates. Typically this does not bode well for the stock market. Right now, there are few places where people can put money to work for them. Are you excited about earning a fraction of a percent in your savings account? If interest rates rise, other investments could look better. People could shift some money out of the market and into alternatives.
  • Sell in May? – There’s a theory that actually has significant statistical basis that one should sell stocks in May as they don’t perform well from May to October in any given year. Whether there is legitimate causation or if it is just correlation is still a question of debate. My take is that it is a warning sign that shouldn’t be ignored.

I’m not a big believer in market timing. If I had pulled all my money from the market and put it in cash last year, I’d have missed out on some significant gains. On the other hand, I see some value in taking some gains on any equities that you feel are “expensive” and holding in cash, or putting money in an under-performing area. I know I’ll be looking to rebalance my portfolio.