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Investing In Waves

Calm WatersCalm days are not very good for sailing.

Funny enough, they’re not very good for investing either.

Housing Prices Vs Inflation

Robert J Shiller, A Professor of Economics at Yale, showed how housing prices (after being adjusted for inflation) have not changed much since 1890. There were ups and downs, but overall the price of housing has remained steady for over a 116 years. With two very big exceptions …

  1. Between WWI and WWII (during the great depression), housing prices were actually averaging about 66% of what they should have been.
  2. From 1999 to 2006, prices have risen steadily to reach 200% over what they should be if they were to stay in line with inflation.

What this means is that if you bought a house in 1890 for the equivalent of 100,000 1999 dollars and sold it in 1999, you would have made 100,000 1999 dollars. There’s absolutely no profit. But as of 2006, because of the largest housing boom in history, it would be worth $200,000 inĀ 1999 dollars.

Stocks Vs Inflation

Over the long term, a portfolio of well performing stocks like the S&P can beat inflation. One study showed that from 1926 to 2005, the S&P index annually returned 10.42%. Inflation during this period was about 3.25% annually. So every year you could increase your wealth by 7.17% or $7.17 for every $100 you invested.

You also have to keep in mind that the companies listed in the S&P index have changed many times over the last 80 years. These changes are little waves and the 7% return you get over the long haul has plenty of better and worse periods.

So, What’s A Wave?

You can see by looking at housing and stocks over the long term that if you park your money in one spot, you’re going to make no to little return on your investment. The only strategy that wins in the end is to move from wave to wave.

If you bought Google shares during their IPO for $85, you potentially made 500% on your money in the first year. That’s a lot better than 7% and that’s a nice wave to ride.

Between 1999 and 2006, housing prices have pretty much doubled. Not as big a wave as the Google one, but a nice ride all the same.

Catching Waves

If you’ve ever done any surfing, you know that catching waves is all about location and timing.

First, you have to be in the right place. At any given moment in time there’s a wave happening somewhere. While the dot com crash in 2000 shook the stock markets, the real estate wave was just heating up.

Next you have to be there at the right time. If you’re too late, you might miss the opportunity. Too early, and it might turn out that what you caught wasn’t much of a wave at all.

So the secret to catching waves is to be on the lookout for them. Always.

Dangerous Waters

There’s always a certain amount of risk when you’re investing. Nothing is a sure thing until after it’s happened. Hindsight is 20/20 right? It’s easy to get mesmerized by a wave, a potential wave, or a wave that’s about to crash into the rocks.

I never buy at the bottom and I always sell too soon.
~ Nathan Rothschild

Nathan Rothschild’s rule for successful investing is great advice. Make sure you’ve got a rising wave before you jump on. And then jump off while it’s still rising and look for a new wave. It’s a lot easier to sell an investment while the price is still climbing because that means people are still buying it up. Once the price peaks, it’s going to be harder to sell.

To Sum It Up

  • You want to keep moving your money into rising waves rather than keeping it parked in one spot. One way you can hedge your bets is to stay diversified. Mutual funds are popular because a fund manager’s job is to find a diversified collection of waves and change them up as needed.
  • Don’t get greedy. Ride your investment and jump off before it crests and you get caught in a crash.
  • Rough seas are necessary for sailing and investing. Wind creates momentum. And waves. And good things come from waves.
Denouement
 

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6 Comments

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