The Danger of Impatience

This week’s Peak Oil Review has an excellent commentary by Debbie Cook, Mayor ProTem of the City of Huntington Beach.  She uses her impatience with an unripe avocado as a metaphor for her (and our) impatience waiting for the signs of peak oil to become clear to the world as a whole.

I like her metaphor because it is also a good way to think about the stock market.  John Maynard Keynes once commented, “Markets can remain irrational longer than you can remain solvent.”  As Robert Shiller points out in his excellent book, Irrational Exuberence, part of the reason that the late ’90s dot-com bubble got so high was that many people who had initially been skeptical were worn down by the continued rise of the market.  Emotionally, it is extremely difficult to go on, day after day, year after year, remembering that valuations are based on so much hype and hot air, when everyone around you is making money hand over fist from that very same hype and hot air.

I started managing money in 1999, and so I only had to endure that emotional strain of being out of sync with the world for about a year before the market peaked, and the reality of the market began to confirm my convictions.  However, I became skeptical about the housing market in 2001, and actively bearish in 2003.  Because of this, when I moved to Tucson in 2003, I chose to rent a house rather than buy one,  and I continued to rent when I moved to Denver in the spring of 2005. 

Renting is a lot less fun than buying, and when house prices are going up 15% a year, the gains you might have made by owning add to the emotional burden.  In retrospect, while I was right not to buy dot-coms in 1999, I was “wrong” to choose to rent in Tucson from 2003 to 2005.  The Tucson market rose considerably during that period, and while the rent I was paying was considerably less than I was earning with the investments I would have had to sell to buy and maintain a house (no, I would not have used a mortgage), the capital gains on the house would have been a nice windfall.

What lesson was there to be learned from my Tucson renting experience?  The wrong lesson would be that you should always buy a house.  House prices in Denver have been basically flat since I moved here (data from Zillow), and rental prices are currently about 5% of house prices.   Considering that many money market accounts are now paying over 5%, and taxes, HOA fees, and maintenance costs are added when you own a home, renting is a better financial deal.  In addition, my time renting has given me the opportunity to learn what part of the city I want to live in, and the current glut of inventory means that when I buy, I will be in a much stronger bargaining position than I would have been a year and a half ago.

The right lesson to be learned from my Tucson renting experience is the lesson of the avocado: patience.  Opinion does not change, oil does not peak, and markets don’t move when you want them to… they do it in their own time.  As Richard Russell says, “The market always does what it is supposed to, but never when.”  

Markets are the economic manifestation of investors’ optimism or pessimism.  In the housing market, pessimism is beginning to set in.  In the oil market, we have a way to go.

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