Financial tip of the day.com - FREEDOM THROUGH FINANCE
Social Sites
  • Financial Tip Of The Day
  • Books
  • Websites
  • Contact Us
  • Disclosure

Why this guy is wrong and Warren Buffett is right.

21/10/2014

0 Comments

 
Editor: Crass Cash
Picture
Do me a favor and read this Fortune article.  

https://fortune.com/2014/10/21/warren-buffett-real-estate/?xid=yahoo_fortune

What's the first thing that strikes you as being wrong with it.  The first thing that struck me as being wrong is that he doesn't include the mortgage interest deduction from owning a house.  He completely ignores that. There are other serious flaws though.  

First of all, as the quote above demonstrates using past figures is a road to ruin when it comes to investing.  The reason Warren Buffett is an investing legend is because he's renowned for seeing into the future.  He has famously said that you can't drive a car by looking into the review mirror.  

Secondly, he assumes a home value increase rate of 4%.  Which is great, I would that happened for everybody and it also hurts his cause.  Why do you think so many people get rich in real estate?  One word, leverage!  By putting 20% down you are able to capture all of the price increase with only 1/5 of the cost.  Let me show you.  Let's make the math easy.  You buy a $100k house and put $20k down.  The house then appreciates 4% next year.  That's $4k that you've made if sold (excluding transaction costs, I'll talk about this later).  So you made a 20% return on your $20k investment!  That's just the first year.  Each year after that you'll make more due to compounding effects.  Try getting that in the stock market year after year.  Now it is true, the transaction costs are higher with real estate, especially with buying, but that's why I'd advocate keeping it for at least 5 years.  That helps minimize the cost per year over time.  

Thirdly, he is advocating you invest in the stock market.  How is that?  He said to refinance if you can.  What are you going to do with that money that equity that you took out of your home, stick it under a mattress??  No you're probably going to put it in the stock market.  I definitely wouldn't put it into bonds.

As far as being short the dollar.  Buffett means in terms of inflation since holding your assets in dollars can't allow for you to short itself.  Do you know any other way to short inflation other than fixed debt?

0 Comments



Leave a Reply.

    Author

    This website was created due to the atrociously misguided financial advice that I've heard over the decades.  Financial freedom is not intellectually strenuous, but it takes discipline. 

    RSS Feed

    Categories

    All
    BHAG UPDATE
    College Savings
    College Savings
    Credit
    Economics
    Estate Planning
    Estate Planning
    Financial Planning
    Financial Planning
    Insurance
    Investing
    INVESTMENT JOURNAL
    Mistakes
    Net Worth Update
    Retirement
    Tax
    Thrift

    Archives

    August 2017
    May 2017
    April 2017
    February 2017
    October 2016
    September 2016
    August 2016
    July 2016
    June 2016
    May 2016
    October 2015
    September 2015
    August 2015
    July 2015
    June 2015
    May 2015
    April 2015
    March 2015
    February 2015
    January 2015
    December 2014
    November 2014
    October 2014
    September 2014
    August 2014
    July 2014
    June 2014
    May 2014
    April 2014
    March 2014
    February 2014
    January 2014
    December 2013
    November 2013
    October 2013
    September 2013
    August 2013
    July 2013
    January 2011

Powered by Create your own unique website with customizable templates.