Dave Sather's Money Matters: Football, pizza and investing
Although the coolness of fall was absent, there was hope as the beginning of the college football season was upon us. To celebrate, Paul, a college friend, invited several of us over to enjoy the game on the big screen. It really didn't matter who was playing - we had enough pizza to satisfy decades of carb-loading needs.
By halftime, there was one crust left amid six empty extra large boxes. During the discussion of halftime football stats, Paul asked me what I thought about the situation in Syria. Another chimed in that it sure had made the financial markets volatile.
Paul quickly added that he didn't trust the financial markets, and he was putting his money into land - a ranch. He offered up his logic, stating that while the financial markets fell 40 percent in 2008 and 2009, his ranch did not fall in value.
I asked Paul, "How do you know; did you try to sell your ranch during 2008 or 2009?" He stopped to ponder my question and then slowly responded with a simple but concise "no."
But Paul wanted to know why I was asking.
I explained that just because he did not receive minute-by-minute quotes on his ranch, it did not mean that the fair market value had been stable. Most likely, if he had tried to sell in March 2009, he would have received a severely discounted offer.
Tom, an engineer, had been quietly listening and then asked Paul a good question; "If in 2009 someone had offered you 40 percent less than you paid for your ranch, would you have sold it?"
Paul immediately replied "Heck no - my ranch is a good investment."
Tom, with his analytical mindset, curiously asked "How do you know? How do you benchmark your returns? Do you factor in the cost of interest expense, insurance, property taxes and maintenance?"
Paul retreated and admitted that he did not factor in the holding costs but added that he "liked" his ranch, and that was why he kept it.
This conversation brings up good points for all investors.
First, non-cash flow producing real estate has historically appreciated at the rate of inflation - or about 3 percent per year. That does not make it a great investment.
Secondly, just because you don't get daily quotes on an asset does not mean that asset is either safe or nonvolatile. You'll never truly know until you attempt to sell it and get firm offers.
Furthermore, just because you can get quotes every millisecond on an asset does not mean those are logical prices. Remember, a quote is just one person's opinion as to what they are willing to pay. Often, having overwhelming access to quotes creates a hyper sensitivity to assets such as the stock market yet far less sensitivity to nonpublicly traded assets.
Investors will have much better results if they approach land or similar illiquid assets from a rate of return perspective. What does it cost to buy, what is the expected cash flow and what are the holding costs? That removes the emotion and instead relies much more on math and logic.
Similarly, investors would be better served if they approached stock market assets as they do land or real estate. Consider it to be a semi-liquid asset that needs to be held for very long time frames. In doing so, you will worry far less about the day to day issues in the world and embrace the opportunities for long term growth.
Finally, as with most things in life, balance and perspective in your investment portfolio is warranted. Having all of your wealth in any one asset is rarely a wise choice.
Dave Sather is a Victoria certified financial planner and owner of Sather Financial Group. His column, Money Matters, publishes every other week.