Warren's Wisdoms- Tulip Bulbs, Tech Stocks & Housing Prices 6/27/05
Tulip Bulbs, Tech Stocks & Housing Prices Some stories are just so good that they bear repeating even if the supposed teller may not actually have said it. Around the financial services world, one of the most famous investors of our age, John Templeton (now it�s Sir John Templeton), is said to have remarked that the four most dangerous words in the English language are: �This Time It�s Different�.
How many times have we heard � as an explanation of rising prices that will never peak � something like: �sure I know what�s happened in the past, but this time it�s different�. In the great economic textbook Extraordinary Popular Delusions & the Madness of Crowds, author Charles Mackay takes us through multiple situations in which popular opinion pushed the value of an item up beyond all reason � yet only in hindsight was it easy to spot the Delusion. Among about a dozen examples of what he calls Madness, neither Tokyo�s housing bubble of the late 80s nor the �dot com� stock bubble of the late 90s is mentioned at all � perhaps that�s because, as wise as the author is, the book was published in 1851. Although times change, human nature, by and large, does not.
Is there a housing bubble in the US today? More specifically is there one in South Central Indiana where most of our clients reside? Just as was true during the recent rise in value of tech stocks, we just don�t know. What we do know is that asset allocation is what has worked for our clients in the past. We know that chasing tulip bulbs and tech stocks to all-time high prices proved to be a mistake, although there was certainly money to be made if you got in & out quickly enough. We recommended rebalancing stock portfolios in the late 90s and, although our suggestions as far as asset class weightings have change a lot, our basic advice hasn�t.
Some of the drivers of increased housing prices make sense in our supply & demand world: low interest rates for CDs and other bond-type investments, uncertainty about stock market investing and the weakness of the dollar attracting overseas investors. Still, there seemed to be no end to sensible-sounding explanations for the previous bubbles.
Do we believe this the US is experiencing a bubble in housing prices? We believe what we�ve always believed:
� make sure you know why your making the investment you�re making,
� make sure your investments are allocated among asset classes,
� make sure you�ll be able to sell an investment if you change your mind about it.
We have substantial information available about housing prices, should you wish specific advice on your own situation.
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