Warren's getting a lot of press today, like he does pretty much anytime he agrees to an interview. And he should.
This is what he said in October last year (and certainly it wasn't the first time we've heard it):
A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful.He went on to sink personal money into US equities--mainly energy and water utilities, railroads and food companies--putting his money where his mouth is.
This is what Warren had to say yesterday:
Warren Buffett said yesterday that the US economy had “fallen off a cliff”, describing the current crisis as “an economic Pearl Harbor” as concern spread about the US Administration’s fitful attempts to halt the collapse of the American banking sector.
It's fallen off a cliff, and not only has the economy slowed down a lot, people have really changed their behavior like nothing I've ever seen.And so it is. Warren's advice is right: Buck the trend; there is money to be made by doing the opposite of what everyone else is doing. Warren's advice doesn't stop there though. He also doesn't invest in companies or industries he doesn't understand, and he doesn't invest in companies with management he doesn't trust. There's actually a whole bunch of rules he has. Some of which I'm adapting below and hoping you'll add to in comments.
Let's face it bears, no matter how hard we might try (and I'd like to point out to you all that I really could care less whether anyone buys a home tomorrow or not), people are buying houses right now and there is nothing we can do about it. Nor should we. But in the spirit of giving, and in the off chance that a prospective Victoria first time buyer stumbles upon this little site, here's some adapted Buffet rules that I think will help you avoid the potential long-term pain that may await some of the more think-less-act-now kind of first time buyers out there:
- Buy real estate cheap: Be a value investor. Calculate fundamental value for a home--examine what similar homes rent for and don't bank on the market value of a home in the future. Look for a home priced as close to rent parity as possible (think $600-$650 per bedroom)--you won't find much, if any, and what you find won't last long in this market.
- Hold for life: If you must buy now, only buy a home you know you can live in for a long time. If you're considering a 1-bed downtown condo with your fiance and you're planning on having a child in the next two years and know you will want to have a house then, find a way to buy the house today. And no, a 2-bed condo is not the same thing. It takes a very special kind of a family to make a go if it in less than 1000 square feet of communal living next door to a retired couple who prefers silence after 7pm, below two students and their boyfriends who think Wednesday evening is the new Friday night, and above a night shift worker who needs daytime for sleeping.
- Be frugal: Instead of reaching financially to own a home, find a home that is appropriate for the long-term, that is priced below your means. I know this seems contradictory to the rule above, and it is, I still think renting is the best way to go right now, but if you "just have to buy" right now, risk as little money as possible, and make sure you can sock away a few extra dollars in a non-real estate savings vehicle each month.
- Don't depend on others to say you're right: This is perhaps the most important rule. Despite the downturn and uncertainty over the future, the dominant belief in Victoria is "You can't go wrong with owning your own home." This is especially true if you're talking to someone who: owns a home they are trying to sell; is selling a home on behalf of someone else; sells products and services that help people buy a home; or bought their current home back when the average price was less than half of what it is today (for the record, that was 2001). If you have even an inclining of doubt, listen to your gut, not the voice of anyone else.
The most recent upswing in the market lasted 10 years (prices rose, albeit slowly for the first 4 years, from 1998 to 2008 on a YOY basis). In the crash of the 1980s, it took 6 years for prices to rebound to their previous peak (built over 4 years and dropped over 4). In the correction of 1990s, prices dropped slowly for 6 years and in the 7th "recovered" to their 1994 peak (built over 6 years and dropped over 6, not adjusted for inflation of course).
Why is this time any different? Why will prices not fall further and not take longer than 5 years to rebound like in the previous cycles? Why will prices not keep falling over the same length of time as they rose (10 years) like they did in the two previous cycles? <-- click to see Roger's graph UPDATED.
The global economy has not seen an economic downturn like this one since the Great Depression. You can afford to wait. If you're a first timer thinking about buying today, you may be best served to ask "can I afford not to wait?"