If I see another blog post telling people to invest in stocks or buy real estate, I’m going to vomit on my freshly polished, piano black dress shoes.
The blair witch is hiding in the fine print.
Where to put your money isn’t simple. If it was then we’d all be billionaires with a capital “B.” I read personal finance content all the time, written by people who have never worked in finance. It freaks me out.
You can lose everything you’ve ever worked for and become bankrupt if you don’t understand the basics of how money works and what factors to think about when investing.
Real Estate Is the Classic Myth. A neighbor that lives near my family bought a property for $1.1M twelve months ago. They sold it last week for $700K. It was in a good location, had beachfront views, and was superbly modern.
The problem: they overpaid.
A lot of real estate is overpriced. People make the mistake of thinking if they just buy property and collect rent then they’ll never have to worry about money again.
Here’s what is missed about real estate:
Having a huge pile of debt creates stress.
Being tied to an investment gives you less flexibility.
Real estate is expensive which means often people have no money leftover to invest elsewhere. This leads to a lack of diversification. There is a lot of dreadful real estate out there.
Owning Stocks Is Misunderstood
Millions of people are diving into stocks this year. More time at home has given people free time to become financially wise.
Buying stocks seems like a good idea. Buying brand name companies or recession-proof companies seems clever. Buying companies like Amazon who are considered an essential service during a global health crisis should make you a genius.
While retail investors are piling into stocks, insiders are escaping the market. They’re taking home their cash cows and converting their living rooms into luxury paradises, thanks to their financial knowledge.
Here’s what is missed about stocks:
Bubbles — Stock market bubbles can be seen everywhere throughout history. Right now the Tesla stock price trades at 159 times forward earnings. The stock market has become disconnected from reality. The same happened in the 2000s with the tech stock bubble.
Stock printing — Many tech stocks can be created out of thin air and they don’t pay dividends. It’s worth delving into this here.
Money printing — The US is printing trillions of dollars out of thin air. This creates inequality — the rich get richer and the poor get poorer. Why? The rich understand when to buy assets and when to sell. They understand that inflation is a hidden tax. They see deflation, and look back at what it did in the 1930s.
Economic fundamentals — Record unemployment and the GDP of a country eventually catch up and affect stock prices. The stock markets have bounced back but the fundamentals of the US and global economy look terrible. Hype blinds investors from economic fundamentals. That’s why it pays to worship fundamentals even when all assets are going up in price.
Markets are driven by psychology — If the collective optimism of a nation like the US changes, then so do the stock prices.
Therefore, thinking about how people will think under different scenarios is important. If the global health crisis is bigger than first thought, what will happen? If unemployment keeps going upwards, will people think differently? It’s not your individual thinking that counts when it comes to stocks. It’s the collective thinking that determines stock prices, eventually.
Forced sale of stocks — People buy stocks not realizing they might have to sell them when they don’t want to. If you need money quickly — because, say, you lost your job or your business took a 40% cut in earnings — the first thing you will do is tap into your cash savings, and then your stocks. You could be forced to sell your stocks at a much lower price than you paid, even though you know you’re losing heaps of money. The buy low and sell high philosophy often doesn’t work practically.
Solution: Context Is Everything. The way to solve these issues with two of the most hyped assets in the world is to understand the context. It’s to understand how stocks and real estate actually work. It’s to do deep research on both. It’s to understand the context around your investing decisions.
The herd of sheep fall for delusional headlines and hype.
The eventual millionaire investors do the opposite. They understand the context and model out multiple scenarios. They don’t take blanket advice like “stocks always go up in the long run.”
Let Japan be a reminder. Japan is the best reminder I can think of. In the late 80s the economy of Japan looked like it could do no wrong. Everything Japan touched turned to huge piles of cash.
Turning Japanese or being around Japanese investors was cool. Then the delusion fell to pieces. The recession started in 1991. Things never recovered fully. Japan’s economy and the recession that occurred is now referred to as “The Lost 20 Years.”
If you were investing in Japanese stocks or real estate and you didn’t understand the context behind what was actually going on then you would have lost a lot of money and still be down decades later if you decided to “hold on for the recovery.”
Timing can work for you and against you
My mates tell me real estate is king. They were right for the last 30 years here in Australia where we’ve had a housing boom.
Those same mates are screwed right now. Their tenants aren’t paying rent and they can’t pay their loans. They’re getting further and further behind. Their banks have told them it might be a good time to sell and get out. The challenge: many other property investors are thinking the same.
The result: they have to sell their property at a heavily discounted price to get out of the market. Much of the gains they made from real estate are gone — all because of timing. Conversely, there are people who are getting in and buying this real estate at a discount.
If the Japan scenario occurs in Australia then they’ll be fools. If the economy returns to the way it was then they’ll look smarter than Steve Jobs when he came up with the iPhone.
See the difference? Timing is everything. How do you understand timing when it comes to investing? You look at the context of what is going on in the world. You look at real data, not headlines.
Free financial information from the internet will set you free.
Try these places to learn about finance and investing:
Investing Is Situational. You Do You.
Investing comes down to how much you can stomach.
Your psychology is different to my psychology.
Your situation is different to my situation.
Your goals are different to my goals.
Your version of happiness is different to my version.
This is why generic advice like “buy stocks” or “collect rent” is ridiculous. If you hate learning about finance then you’re going to dislike stocks. If you hate having debt then real estate is going to weigh down your thoughts and give you a dreadful night’s sleep.
You have to do you when it comes to money and investing or you’ll take someone else’s dream and turn it into an accidental nightmare.
The Economy Can Turn Quickly. The world of finance can change quickly — we saw that in 2008. A few days before the big crash many prominent leaders were saying “the banks are fine.” Days later those same banks were filing for bankruptcy.
Just because everything looks calm and like it’s all returning to normal, doesn’t mean it is. Governments have a vested interest in keeping you in the dark and away from a financial reality that could induce fear or panic.
That’s why you have to look beyond the headlines and the hype, and see reality with a financial education.
It’s never enough, even if you hit the jackpot and get everything right with investing, it will never be enough. Take it from me. I’ve made plenty of money investing over the years and it took me a long time to see the target amount of money I made from investing was never enough.
That’s why you have to look beyond money to find meaning in your life. To look outside of your selfish desires and into what you can do for someone who can’t give you a dollar.
The point of investing and money is to transcend the habit and realize it’s not the outcome of your life.
I’m not quite there yet, for the record, but I’m well on my way.
Final Thought: Question Everything
That’s why I wrote this article. The key point here is to question everything. Don’t let some noob on Twitter tell you what stocks to buy or tell you to jump into debt to have a whole lot of properties.
A lot of your financial reality is really a delusion.
You work your entire life for money and it becomes part of your life’s scorecard. When you start to look under the cover of the economy, stock market, and real estate what you’ll find is not what you expected.
You will see that everything is subjective. One human’s passive income machine is another human beings fast-track to bankruptcy.
You can make a lot of money when you understand the context and not get sucked up in the hype that becomes a lie.
This article is for informational purposes only, it should not be considered Financial or Legal Advice. Consult a financial professional before making any major financial decisions.
by Tim Denning