There are many people think they are the gurus of investment, but are they, that includes me.
They love to talk about investing. But what is "investing"?
Investing in the FED architected boom and bust cycle has different meaning. One is speculating; the other is leveraging.
Being in WXC so many years, I observed that most people are in one of these two categories.
Investing in essence shall really mean savings. You save the extra and hope to accumulate enough to retire. The buying power shall stay the same or better. But people do not know the wealth can not be measured in dollar because it has lost 99% purchasing power since early 1900. So in this era, investing shall really mean preserving purchasing power while accumulating the earnings saved.
The correct way to invest is 1) no leverage or 2) hedge the leverage. For example, some one wants to "invest" in real estate. Then first, hedge to downside of real estate, in which, no leverage meaning no mortgage and more importantly, wait for the bubble to go busted. But realizing that FED and government can not tolerate the deflation, hedge on inflation a little more. So here is one good way to invest in real estate:
1) figure out the conservative mix of down payment and mortgage, I calculated that the best mix is 50:50
2) for every dollar one has in mortgage, invest extra $1 in liquid investment, say TIPS or foreign bond fund.. In deflation scenario, that you can sell TIPS to payoff the mortgage, in case one lost job.
3) For every dollar one has in mortgage, invest $1-$2 dollar in inflation hedge, say gold. When inflation kicks in high gear, one can sell a quarter to half of the gold to pay off the mortgage while holding another half for raining days. (Assuming gold doubles. It already doubled and will double again in the coming years) The TIPS shall also perform well in this scenario.
Here is amount of money one needs to play, say a $200,000 house or land:
$100,000 down payment for the property
$100,000 TIPS
$100,000 to $200,000 gold
Total investment in a single house: $300,000 - for a $200,000 house.
One must say, you are dumb and stupid. Was I? This is the safest combination of investment, inflation or deflation, period.
But there are some caveat: Real estate has distinctive disadvantages:
1) Undivideable, you can not cut house by half to sell it for raining days
2) Unmovable
3) difficult to sell, especially when one needs money the most
4) can not hedge against social chaos
5) it is visible in government's eye, so it is an unlimited tax revenue source for government. That can easily make the investment cash flow to be negative. (50:50 mix helps, but no guarantee)
For those thinking about to dip the feet in the murky water, think twice. Do you have enough to do the hedge mix above? (Beside all the headache of being landlord)
p.s. Next twenty years will be turbulent. Wars, Tax revolt, Trade wars, banking collapses are all possible. One really needs to ask this: why Real Estate anyway?
Sincerely yours,
