Промышленный лизинг Промышленный лизинг  Методички 

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chapter eleven

TIMELY ADVICE

Investing in the Meanest of Markets

A Generation of Rewarding Risk

In the introduction we met Adam, my former Harvard Business School student who asked, Where should I invest my money? In the early 1980s, I grappled with the same question. At the time, I lived in southern California and did a lot of surfing with my buddy Gary. Surfers spend far more time bobbing around in the ocean waiting for waves than actually riding them. Gary and I filled our spare time with a debate about how to make money; I argued that stocks were the best investment, while Gary favored real estate.

I loved stocks in the early 1980s because they were amazingly cheap! The Dow Jones Industrial Average sat near 1,000, and fantastic companies had single digit price to earnings ratios. Garys love of real estate was based on supply and demand. There is a limited supply of beach real estate and, over time, essentially an unlimited demand by people who want to soak up the sun.



Gary and I each acted upon our beliefs. I invested every dollar I had into stocks, while Gary developed an aggressive system of acquiring real estate. As soon as he could scrape together a down payment, he would buy a rental property. He would then squeeze every possible penny out of the rents and minimize costs (he even went so far as to do the weekly cleaning of his beach properties himself-I always pictured him in a wet-suit and a maids outfit). As soon as he amassed enough cash for another down payment, Gary would buy another property to increase his empire.

So who was right, Terry or Gary? In the early 1980s, was it better to have invested in stocks or in southern California real estate? Stocks have gone up by more than 1,000% while land values have steadily increased, but at a slower rate. So does that mean I was right? No. As we discussed in Chapter 9, real estate allows much higher leverage than stocks. Thus, Garys aggressive-buy as much as you can with borrowed money-strategy earned him a far higher rate of return than was possible in the stock market.

While Gary and I were both bored by bonds, they too provided very strong returns. In 1980, an investment in bonds, particularly a risky investment in long-term bonds, would also have been richly rewarded.

In the early 1980s, picking the right investment was easy. Stocks, bonds, and houses all soared. The only possible mistake, therefore, was to avoid financial risk. For an entire generation, risk was richly rewarded. The only way to lose, it turned out, was not to play. So if Adam were asking his question in 1980 the answer would be clear-borrow as much money as you can, take as much risk as you can stand, and rake in the cash. The conventional wisdom says that risk is still the right course for patient investors who seek high returns. But is it?

The Bull Market of a Lifetime?

The famous Chinese curse says May you live in interesting times. The quirky aspect of human nature is that we are built to expect that our



own idiosyncratically interesting times are simply normal. The international man of mystery, Austin Danger Powers, experienced a variant of this problem.

In 1967, Austin Powers (played by Mike Myers) was cryogenically frozen to prepare for the day that archvillain Dr. Evil (also frozen, and also played by Mike Myers) might once again threaten the world. Decades later, Austin was thawed when this threat materialized. Elizabeth Hurley, playing minx -like agent Kensington, became the partner of our recently defrosted superspy.

Agent Kensington introduces herself, Mr. Powers, my job is to acclimatize you to the nineties. You know, a lots changed since 1967.

Austin replies, No doubt, love, but as long as people are still having promiscuous sex with many anonymous partners without protection while at the same time experimenting with mind-expanding drugs in a consequence-free environment, Ill be sound as a pound!

The joke, of course, is that the norms of the 1960s regarding sex and drugs had become abnormal by the 1990s. This is not unique to the 1960s. Modern societies change very rapidly, and we are built to be perpetually behind the curve, thinking that this generations fad is a permanent feature of human existence.

Like other aspects of human nature, our tendency to underestimate change may reflect our ancestral past. For tens of thousands of years, at least up until the invention of agriculture, our ancestors lived in a world where many important attributes never changed.

Our human tendency to expect that the future will be like the past may have helped our cavemen and cavewomen ancestors, but it does not work well in a rapidly changing modern society. It works even less well in financial markets where todays fad is likely to be tomorrows loser. Recognition of the current situation is crucial as my friend Matt discovered.

A few years ago, Matt had a romantic dinner in Budapest overlooking the Danube River. A violinist approached the table while playing enthusiastically. After he completed the piece, the musician asked Matt if he



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