Definition of a bubble: “When no other intelligent investor will pay you what your asset is currently worth.”
I recently talked to a packed crowd at the latest AOA. meeting. It was standing room only; wall to wall. Hmmmm, I wonder what’s going on? So I made the statement, “You guys are either really excited or really concerned, which one is it? The question asked by a person up front, “Are apartment values in a bubble?, confirmed my suspicion.
So, I asked a very simple question, “Would you buy your apartment for what you could currently sell it for?” The reaction surprised me! There was a hesitation and then rolling laughter swept the crowd. Wow, that’s the classic example of a bubble; own an asset that’s gone up so much that no intelligent buyer will take your place at the current price. I wonder how many apartment owners decided to sell that day?
I’ve been involved as an investor in three bubbles. One was mild, but the other two were outrageous. Two of the bubbles, I was blissfully unaware. Only one of them was I able to recognize, take advantage of the situation, and cash in my chips.
One of the bubbles I was involved in, but unaware of its existence, was the real estate bubble that ended in mid-1989. I had been the benefactor of the bull run of California real estate prices from about 1985 to 1989. I built a custom home, built spec homes, and flipped houses with consistent success. One of the big paydays came in the form of getting involved in some vacant lots in Palm Springs. That one project made over a million dollars!
I was pretty convinced at the end of that project that I was getting really good at this stuff! I decided to build seven custom homes and proceeded to take a three year journey that would see my real estate fortune shrink considerably. I finished the homes in June of 1990 and missed the peak of the market by only six months! It was a painful, but a valuable lesson!
At the end of 1999, I was doing well in the real estate investor business again. For some reason, my attention got diverted to stocks…penny stocks! My dad had some explosive results investing in some of these penny stocks and captured my attention.
In December of 1999, I followed dozens of penny stocks. To my amazement, almost all of them went up. Way up! There were several penny stock sites telling of the next great stock pick. Almost every pick they made went up.
I thought, “Holy cow, this is something!” I wrote a check for about $250,000 and spent all of it on penny stocks the next day. Every morning, I began my day trading penny stocks.
If you’ve ever traded stocks, a green screen is your friend! My screen was almost always green for the first 75 days! I parlayed $250,000 to over $800,000 in less than three months!
Being the educator that I am, I began to write a penny stock course. I had outlined about 15 chapters when something happened! All of a sudden, all of my stocks fell, and then fell off a cliff.
My $800,000 turned to $650,000 in a week. Did I sell? No, don’t be ridiculous! I’m down 20% but still up over 100%. Within a month, my $250,000 was at $250,000 and teetering. Did I sell? No, don’t be ridiculous! All of my gain is gone, but I am a pretty good stock investor and I’m just sure this set back is temporary.
About two months later, I sold all of my penny stocks (fully understanding why they were so named) for about $100,000. I had passed on a $500,000 gain, a $350,000 gain, a break even, and finally gladly settled for a $150,000 loss.
What an amazing lesson on not only investing but the torment of going through a boom and bust cycle when you don’t know when to pull the plug.
In September 2005, I wrote a 400 page report entitled, The California Crash. That report outlined the coming crash in California real estate prices, the explosion of foreclosures and encouraged those that would listen to exit before the carnage began.
By mid 2006, I sold everything I owned in California except my residence. As it turned out, I sold early. Prices continued on their record pace upward for another year and a half! I had missed the peak by 18 months. Here’s a great question: Did I care?
The answer was and is a resounding NO! I was in a position to cash in on life-changing money. I had been there before, but wasn’t experienced enough to know when enough was enough.
This time was different! I did know we were in a bubble, and I decided to sell.
The AOA audience, by their reaction, realizes that prices for apartments in many areas are at bubble levels. When an entire audience laughs about buying their own property at its current valuation, you have a bubble.
How many will cash in? There could be a lot of reasons not to – including great location, fixed low interest rates on your property, or you have all the cash flow you need for the rest of your life.
The one reason you don’t want to give yourself not to sell is that there will always be someone who will willingly take your place at the current evaluation. I have found out several times that’s not always true.
Bruce Norris is an active investor, hard-money lender and real estate educator. A talk show host in his hometown of Riverside, Calif., Norris is a frequently quoted in financial publications and a speaker at investor club meetings throughout California. His latest study, The California Comeback 2, was released in July 2013 and provides the statistics that substantiate his predictions. More information about Bruce Norris, his research and his investment seminars are available at www.thenorrisgroup.com.