Have Market Speculators Pushed Small Investors to Real Estate?

Henry Blodget on Clusterstock notes that the average holding period for New York Stock Exchange stocks has declined to six months. Blodget’s take is that this doesn’t constitute investing.

In any event, can we please stop pretending that what most fund managers are doing every day is “investing”? Holding stocks for six months isn’t investing. It’s trading. And because trading is a negative-sum game–one largely focused on trying to figure out what everyone else is doing–it is really speculating.

When you’re speculating, there’s no reason to pay attention to things like fundamental analysis, valuation, future cash flows, and all the other stuff they teach you in security-analysis school. For holding periods of less than six months, those things don’t mean jack. Over holding periods that short, the game is all about figuring out what everyone else thinks and then gambling that you’ll be right and they’ll be wrong.

So remember that next time your favorite fund manager sends you a note patting himself on the back for his investing prowess. What he’s really talking about is speculating.

One of the things that I’ve found puzzling has been the the willingness of small investors to embrace the residential real estate market. By all accounts, investor interest in single family rental homes is higher now than even during the bubble years. One might have expected a distinctly different reaction but maybe Henry’s point helps explain the contradiction.

It might very well be that the small investor has caught on to the game going on in the securities markets and figured out that his ability to control his own destiny in those markets is close to nil. Having seen a decade of sub-par returns and then being immolated in the meltdown earlier this year, they may have just tossed in the towel.

Possibly they’re saying of real estate, "I can understand this, I control the investment and given prices I can be relatively confident I’ll generate positive cash returns. If it appreciates over a number of years then fine, I’m even further ahead. In other words, they’re trusting that old-fashioned buy and hold with a positive current carry will still work."

If that’s the case — I realize I’m doing some heavy duty speculating here — then perhaps the next Wall Street trend will be back to real buy and hold with an emphasis on current income. They would just have to figure out how to justify their fees and replace the churning income.

Comments

[nym:]

Unfortunately the income from single-family residences seldom is enough to pay expenses and pay a suitable return on capital invested, your own or mortgage. Yes, this downturn does provide a rare opportunity to buy, but you face several years of small losses before there is a cyclical return in prices. Family fortunes have been made this way, but all real estate is local, so your experience may vary. Will the local economic engine provide the jobs necessary to pay rents and buy houses?

Aug 09 09:38 AM

[john s. gordon:]

rental real estate can work provided that you have 12 mo/yr occupancy & the local govt doesn't jack up your taxes. it did work for a while in 1981-83 when the reagan tax code gave you accelerated depreciation coupled with cuts in capital-gains tax. don't count on that ever happening again.
> jack

Aug 09 10:24 AM

[Trane250:]

"In 2002, then New York State Attorney General Eliot Spitzer, published Merrill Lynch e-mails in which Blodget gave assessments about stocks which conflicted with what was publicly published. In 2003, he was charged with civil securities fraud by the U.S. Securities and Exchange Commission. He settled without admitting or denying the allegations and was subsequently barred from the securities industry for life. He paid a $2 million fine and $2 million disgorgement."

Why must you quote from such a person? Henry Blodget's embrace of prudent long-term investing is akin to Bernie Madoff's being put in charge of all bank examiners.

Aug 09 12:37 PM

[john s. gordon:]

blodget is a publicity hound & can't resist mouthing off. in some future administration he will be secretary of the treasury.
> jack

Aug 09 05:07 PM

[inca jones:]

To reference a clown like Blodget only serves to destroy your own credibility.

Aug 09 06:21 PM

[yk__:]

Answering nym: My experience varies from yours. Since I have a choice of where to invest, even with 60% churn rate per year I have a (slightly) positive cash flow. This is incredibly better than the stock market.

Aug 09 06:30 PM