3 Lessons Learned From A Stock Market Crash Applied to Property Investing

Czech Point 101 October 31, 2014 @ 11:05AM

“The definition of stupidity is doing the same thing over and over again and expecting different results.” — Albert Einstein

How can this be applied to investment property or investment in general?

Most stock markets reached their lowest point in years in March of 2009. The carnage was widespread and devastating. I would be lying to say that I predicted this fall and had the foresight to sell out all our stock and mutual fund investments.

However, one thing that I did read again and again was that the rallies coming out of stock market crashes were spectacular. Trusting that history repeats itself and knowing that there was no way I could predict the bottom of the market, I systematically invested money in ETFs each time the market had a big drop and hit a new low. I did this from the fall of 2008 until the spring of 2009.

Sure enough history held true and by the time of selling out at the end of 2009 when the money was needed for another venture, these investments had averaged a 30% return over the year. It helped to erase losses I had sustained in the parts of the portfolio I had held from earlier.

S & P 500 Prices Since 2007

S&P 500 Index Prices Since 2007

I will be the first to admit that I am not a guru investor or a huge risk taker but I like to think I am analytical and I always try to learn from history, whether from others history or my own. I don’t want to fall into Einstein’s definition of a stupid person by doing the same mistakes through my life (or repeating the mistakes of others) with exactly the same consequences.

What did I learn (or hope I learned) from the above experience in terms of investing in stocks? A contrarian viewpoint is valuable in terms of investing. It takes guts and you have to really believe in what you are doing in order not to sell short. In retrospect I wish I had trusted my research, had a lot more guts and invested a LOT more money.

I am also glad I did not sell my existing portfolio at the bottom of the market even with fear raging that markets would fall far, far lower. Because of the holdings contained in the portfolio, it has actually recovered it’s full value even though it now shows no return or very little over the years it was invested.

Here is a fantastic chart which shows typical investor sentiment swings and when the best opportunities are.
Market Sentiment Cycles

Market Sentiment Cycles

Now, what lessons can we take away from this and apply to the current property investment market?

First of all, I have to emphasis that the factors below are only talking in terms of capital growth. There are many other factors to consider for an investment property and the most important is cash flow but this topic is for a separate discussion.

Also, because of the illiquid nature of property, prices and the cycle move at a much slower pace than do the cycles in a stock market. There is much more time to make a very calculated decision about your investment.

1. Judge market sentiment

Where would you say that real estate investors now fall on the chart of Market Sentiment Cycles? For the US real estate market, I would personally venture to say that the average investment owner must be past panic and either at the capitulation or despondency stage.

What about in Czech Republic among those who invest in property (ie. not for personal living)? I would venture to say that we are also somewhere between desperation and capitulation. Personally the majority of comments I hear are that Czech real estate prices will fall still more or that they will be flat for years and years.

Can a person reliably predict the absolute bottom of the market? No.

2. Don’t sell out anywhere near the bottom

After realizing that they bought at the wrong time in the cycle many owners may be tempted to sell out and move their money along. However, by selling at the bottom or close to the bottom they risk missing the recovery which often occurs after a big fall.

3. Invest at regular intervals

We can’t predict the absolute bottom but by purchasing at regular intervals we have a good chance of buying at a great price which will give us a great return over the long run.

With the large amount of money involved (for most investors) this last step can be very difficult and you might be able to make only one purchase at the bottom of the cycle swing. However, this will be a purchase that does you well.

Does anyone want to fit Einstein’s definition of stupidity in terms of our investing by repeating the same mistakes for the same results? The choice lies with each one of us. Have you learned from your past mistakes?

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  1. CZECH POINT 101

    Interesting feedback from John Paulson (http://bit.ly/dkOx86):

    As this is the best time in 50 years to buy homes, Paulson advised his listeners, crowded into 3 separate dining rooms, to issue 30 year mortgages to buy a home as “your debt and interest payments get locked in at record lows, while the price of your home will rise.”

    “If you don’t own a home buy one,” Paulson recommended; ” if you own one home, buy another one, and if you own two homes buy a third and lend your relatives the money to buy a home.”

  2. CZECH POINT 101

    Wednesday, February 15th, 2011

    Article: 15-year mutual fund review: Market crash now history – http://bit.ly/h24kX0

    Now equity fund managers in Canada have completely reversed losses of 2008 with returns of 18% in 2009 and 13.5% in 2010. To convert an adage regarding marriage: “Sell in haste, repent in leisure.”


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