A Canadian on Wall Street

I’ve been reading the second edition of Robert J. Shiller’s Irrational Exuberance, with its 2005 additions and a part-focus on the numerous real estate bubbles that seemed counterpart to the stock bubble that initiated the book. He makes the excellent point that real estate has actually been a pretty mediocre investment except for in a few rare, short timeframe situations — one of which we happen to be in now, but for how much longer? Much of the long-term gains disappear in the light of inflation. He also makes a good point in one of his syndicated columns that real estate as an investment was not a very common thing for much of the past century, that talking about real estate the way we do now even a few decades ago would have been analogous to collecting cars — it was done, but not commonly and the house was not viewed as an investment vehicle, but as it is: the place you live.

Before the real estate boom of the late 1970’s, hardly anyone was worried about rising home prices. A search of old newspapers finds surprisingly few articles about the outlook for home prices. Those that did appear generally seem to be based on the assumption that minor fluctuations in construction costs, not massive market swings, drove the modest home price movements that they noted.

Indeed, hardly anything interesting about home prices was ever reported at all, aside from an occasional comment in an article about something else. For example, an article in The Times of London in 1970 argued that rising home prices reflected the switch to a new British Standard Time (imposed as a three-year experiment in 1968 to facilitate commerce with Western Europe by putting Britain in the same time zone). The article claimed that the change raised costs by forcing British construction workers to perform more of their jobs in relative darkness. Speculative investment behavior was hardly an issue in those rare instances in which home prices were discussed.

To understand the nature of the subsequent shift, consider that it is hard to find anyone today who worries that automobile prices will soar because rising demand in China and India for steel and other materials will push automobile prices out of reach in the future. Though a small group of collectors invests speculatively in antique or specialty cars, the idea of speculating in automobiles just is not in the public consciousness. That is how it was with housing until the late 1970’s.

Anyhow, very appropriate reading these days. It’s been an interesting past week, with various pundits arguing back and forth about whether this is a temporary blip versus a longer duration thing. I’ve sold out of most of my positions, with some moderate gains and some moderate losses, because I’m a little bit wary — I really have thought the market was overpriced and slim pickings, but I was still putting money in speculative stocks when I probably should have remained in cash or moved strictly to dividend-based investing. Why was I doing this? Because it’s hard to sit on one’s hands when you’re babysitting a cash hoard; the tendency is to want to be active, to make “moves”. Anyhow, I don’t know what the market will do in the next while, but I felt uncomfortable where I was — I had some exposure to emerging markets, too — and so I just had to follow my instinct and sell. I may be wrong, but don’t kid yourself that there’s some empirical basis for buying or selling. It still always comes down to hunch.