Editor: Tunnerminnerwait

We live in an extraordinary time.  We live in a time where just about anybody can make money regardless of what happens.  The stock market goes up, you make money.  The stock market goes down, you make money.  Volatility increases, you make money.  Volatility decreases, you make money.  Housing goes up, housing goes down, you make money.  You get the idea.  People are quite familiar with the idea that when something goes up in value, they make money.  So it should come as no surprise that you could make lots of money when the stock market fell.  Welcome to the wonderful world of shorting and options...

Editor: Crass Cash

People love it when the stock market goes up. If you're a value investor you love it when the market falls. One thing you can be sure of is the market will either be going up or falling. The psychology of dealing with this can be absolutely essential. If you sell during a fall you'll miss out on the rebounds. During a bull market your brain can become euphoric. Dealing with both scenarios requires emotional intelligence EI.​

I'm sorry fiction fans, GARP is not a person when it comes to investing.  Instead it's an acronym for Growth At A Reasonable Price (please don't correct me about the extra A I didn't invent this).  There is a constant debate about which method of investing is better: growth vs. value.  GARP combines the two.  

While Warren Buffett has never explicitly said that he's a GARPer, he may have very well have invented it.  Buffett started out as a die hard value investor, strictly buying stocks that were incredibly cheap based off of their balance sheet.  His philosophy slowly changed to more growth oriented companies, but as always he wasn't willing to over pay for them.  

Let me explain the difference among these using real estate since that's a lot easier for people to value.  Value investing is only willing to buy a house for a lot less than its replacement cost.  You see a house and it's selling for say 50% of what it would cost if you had to build a new one, that's value!  The problem is that it may be that cheap for a reason.  Like for instance it's in a bad neighborhood and you can't rent it out for anything.  No cash flow.   

Growth on the other hand is buying something that is overvalued and hoping that rent pays for it eventually because the rental rates are growing very quickly.  You buy an investment property where cash flow from rent isn't enough to cover the monthly costs of the house.  But you're hoping that the prodigious increases in rental rates will eventually cover this gap and the property will be worth much more later.  Here's the problem.  The growth may not come and you're stuck with an investment that is losing money each month.  Just ask all of the investors who bought real estate using this method over the past 7 years.  

Now here's the beauty of GARP.  You buy a piece of real estate that you know can be rented out for X dollars. After doing your cash flow analysis you see that this will be less than (with a nice margin of safety) your projected rent.  Thus creating a situation where it's making you money and you're not hoping that something has to change.  Even during the worst of the property bubble, rental rates only dropped about 10%.  If you had a nice cushion you would have been fine through out the whole bubble.  

Finally, and most importantly, if you can't find any investment meeting GARP standards, don't buy into that market!  It's a good sign of a price bubble.