Investment Newsletter for the end of May, 2017

The market was flat this month. A few things very slightly up, a few things very slightly down, and a lot of boring.

I have told everybody many times that I think the crowd is usually wrong. They rush in and rush out based on emotion. Over long periods (many years), these emotional reactions average out to more or less the long term economic growth rate. In the short term, greed and fear cause overreactions. A greed overreaction is a bubble. I do not know the term for a “run screaming for the door panic” (2008 anyone) but panic is not my topic for today. Bubbles are and in particular real estate. I worry when the crowd disengages their brains and I worry when the “experts” say this time is different.

This month or so I have had three clients contact me wanting to flip houses. Not one of them had contracting experience or knew anything about repairs. They were going to hire contractors. The way you make money on real estate is by doing the repairs yourself or by buying when the property is cheap. Do any of you believe property is cheap right now? So essentially, they were playing the greater fool theory. Let’s buy now because someone will buy it from me for even more. It was clear that these people were acting from greed. Warning bell number one.

The most dangerous words in finance are “this time it’s different.” The truth is it is never different. People just have short memories. A few days ago, I read an interview with the head of Coldwell Banker’s parent company. He stated, and I am paraphrasing, that real estate was not in a bubble because the banking system was different. He argued that the system was set up differently with more safeguards therefore a crash was a long way off. Real estate prices are set by buyers and sellers, not by banks. I realize that his agenda was to promote his industry and that his was only one voice. Nonetheless, warning bell number two.

We all know that real estate prices have gone up by far more than people’s wages. Properties are routinely selling for much more than asking price with multiple offers. Meanwhile, builders are putting up new properties as fast as they can. People are buying with cheap interest. Watch out when interest rates go up, likely at some point.

I was recently in the Salishan mall at the coast. There were dozens of vacancies and only two or three that had tenants. So I asked a tenant (the lady cutting my son’s hair) what happened. She said the new owner raised the rents and everyone went out of business. Since then they lowered the rents and she thought some were coming back. Rents are flattening or going down in Seattle and Portland as well as most big cities. Time on market is starting to lengthen at the very top end.

Bubbles are irrational and unpredictable. They do not always collapse in a big implosion like a balloon popping. Sometimes, they hiss out slowly over a few years. I cannot tell you how this bubble will collapse, when it will start collapsing, or how low it will go. I am putting my name on the line and saying we are near the top.

New Fee Schedule

Rate Assets Under Management
1.44% Below $125,000
1.00% Between $125,000 and $750,000
.85% Between $750,000 and $1,250,000
.80% Between $1,250,000 and $1,750,000
.75% Between $1,750,000 and $2,500,000
.70% Between $2,500,000 and $3,250,000
.65% Between $3,250,000 and $4,250,000
.60% Above $4,250,000

A single rate is applied to the whole account. Compared to my old fee structure, under the new fee structure the cost for a $1 million account would be $500 lower per year and the cost for a $1.5 million account would be $1,500 lower per year. I will still waive personal tax return fees for accounts over $1 million. All services stay the same. I am just lowering my upper end fees. For accounts that are above $5,250,000, we’ll need to discuss a custom rate.

As I’m writing these to help my readers, I would be very appreciative of any input in regards to what I should write next. If you want me to write about a particular topic, please contact me. Please contact me if you would like to submit a post to my blog.

If anything that I mentioned above interests you, please consider downloading my free e-book. The book contains my thoughts on investment management and some information that I think everyone should know. You can also download it below.

E-Book Download

Questions for the comments

Did my newsletter make sense? Do you agree or disagree with what I said?

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