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April 11, 2005
A Bubble in Bubbles?
Barry Ritholtz, chief market strategist at Maxim Group, has written an amusing commentary about the bull market in bubbles that we seem to be in the midst of. He cites references to bubbles in housing, China, debt, oil, and interest rates.
Yet he concludes that most of these are not bubbles at all, even if they are examples of rapid price appreciation. He thinks that all those pundits, strategists and (yes), journalists, that missed the tech stock bubble of the 1990s are now seeing bubbles everywhere they look.
Even if there is a price drop in some areas (like housing), a 25% plunge wouldn't be comparable to the tech stock bubble bursting, which wiped out 80% of shareholders value, he reasons.
"We advise not taking the wrong lesson from Bubbles past," Ritholtz writes. "Instead, investors should be flexible and adaptable when confronting the unknown."
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25% drop in Real Estate not as bad as an 80% drop in stocks?
Let's look at how most invest in both.
Housing: $1 mil home, 5% down ($50,000), housing drops 25% or $250,000. Investment performance: -500%
Stocks: $50,000 invested, 50% margin($25,000 loan), stocks drop 80% or $40,000. Because the broker would require you to pay back a portion of the loan as the stocks drop, your total loss would be limited to about $20,000. Investment performance: -60%
You can't lose more than you invested in stocks (excluding any taxes owed), but you can lose a lot more than your downpayment in real estate in cash, plus you can get booted from your house if you can't make the mortgage payments that are likely to double in the next few years for all the ARMs out there.
Just watch what happens in the next few years. The tech bubble will pale in comparision...
Certified Financial Planner
Posted by: Tim Murray at July 19, 2005 09:25 AM