Learning From Isaac Newton – “I know quite a few people who sold at peak just before the 2008 correction. Their plan was to buy back in at lower prices. They are all now waiting and losing pace to the market every month.”

eyesthebye at RE Talks 18 Dec 2010 12:24pm“I know quite a few people who sold at peak just before the 2008 correction. Their plan was to buy back in at lower prices. Guess what? One is still living with her folks, another can now only afford a townhouse, and a couple more are renting, waiting and losing pace to the market every month. If I ever decided to sell it’ll be because I have an accepted offer on another house. Check how many “smart” waiters/renters there are on this site [RE Talks]. Waiting to buy real estate is the dumbest strategy… better to buy real estate and wait.”

Learning from Isaac Newton’s experience:
Okay, these players could listen to their friend ‘eyesthebye’, and plunge back into the bubble market ASAP (buying even less for even more; exposing themselves to the market, again). Alternatively, they could stick with the conviction that led them to sell in 2008 (that Vancouver RE was ridiculously overpriced and due for a big correction) and stay out of the market.  If they take the latter course they will,  in our opinion, ultimately prevail, and then some. In the coming crash prices will likely drop far, far below those of the 2008 peak.
During the South Sea Bubble, Isaac Newton, perhaps the brightest guy on the planet at the time, made a lot of money selling into the first half of the run-up. Then, enticed by the promise of further gains (and, who knows, perhaps because of the taunts of the early-1700s likes of ‘eyesthebye’) he stepped back in, just in time for the final peak ‘n plunge. He lost 20 thousand pounds, at a time when ‘a middle class family could live very comfortably on 200 pounds a year’. If he’d simply stayed out of the market and waited, he’d have been one of the  very few people who made money out of the bubble. -vreaa

“The maxim that credit was not wealth unless it rested on a wealth-producing asset had been ignored”. – John Carswell, historian, ‘The South Sea Bubble’, (1993)
“Snap; ditto.” – Vancouver RE 2010

13 responses to “Learning From Isaac Newton – “I know quite a few people who sold at peak just before the 2008 correction. Their plan was to buy back in at lower prices. They are all now waiting and losing pace to the market every month.”

  1. Hi Guys,

    A friend of mine posted a message on facebook saying that he was looking for a place to buy. I sent him a private message to suggest him to read this blog and a few others, hoping that he would hold off on his decision. Here is the answer that he gave me. I would be happy to get your views and report back to him. I really feel he’s making a mistake, but sometimes you can’t protect people from themselves:
    ” I surely won’t dare to disagree that the risk of a potential real state crisis has increased due to the low interest rates, easy credit, and consequent increasing household debts, etc.
    However, since I arrived in Canada some people have been expecting a real state crash in Vancouver for different reasons: 2008 financial crisis, the olympic games; etc.
    On the other hand, some other people think that real state prices in vancouver will never drop significantly, due to the shortage of available land…
    Meanwhile, I now realize that I have spent over $75,000 to pay for my rent in the last 3.5 years… and I will never see this money again, that’s for sure…
    I mean, I totally see your point, and actually nobody can be sure if a mortage will or will not be a good deal at this time…
    I really don’t know who is right or wrong… and so I guess I will keep looking around and I think I will probably buy a place if I see a good opportunity on a place that I like. Besides, it’s probably better to buy now, when interest rates are low, than the opposite…
    Anyway, we should keep discussing about that… ”

    Thanks for helping me out with that…

    Cheers,

    Flo

    • Your friend spent $75000 on rent in 3.5 years which is $21,400 a year. The cost of rent includes maintenance costs and property taxes, but let’s ignore that and pretend that all the rent went to paying interest on a mortgage.

      How much does your friend intend to spend on a place? At 4% interest-only, a 535000 place will cost $21,400 a year. Money spent on interest is money you will never see again; just like rent.

    • With all due respect, someone who says “real state” instead of “real estate” may not be ready to spend hundreds of thousands of dollars on the stuff.

    • Meanwhile, I now realize that I have spent over $75,000 to pay for my rent in the last 3.5 years… and I will never see this money again, that’s for sure…

      I love this. Did he also calculate how much he has spent on lattes? How much on interest payments on his Credit Card? How much on the car?

      I really don’t get why people consider rent a “nasty expense” but have no problem with interest payments.

  2. Isaac Newton
    Even Isaac Newton got caught up in the South Sea mania and invested a big chunk of his fortune. Interestingly, he pulled out early (after making a respectable 7000 pounds) then went back in after the bubble continued to inflate. The inevitable bust happened and he lost 20,000 pounds – a considerable sum at the time.

    As a result of this crisis, he stated “I can calculate the motions of heavenly bodies, but not the madness of people”.

    Wonder what he would say today about the madness in Van.

  3. On an interesting note resident RET douchebag Johnny Horton resurfaced a vreaa post from last December outlining the case for a bear market for Vancouver real estate.

    While the thesis may be correct the timing is far from certain.

    • Well, we did call it “Prediction 2010-2019”.
      All of the arguments still hold.

      Regarding RET –
      Avoid wrestling with a pig in mud, the pig enjoys it, and you get covered in mud.

      • Or, avoid arguing with a fool. Onlookers may not be able to tell the difference. 🙂

      • jesse -> The intended (or unintended?) irony is not lost on me:
        Until the bubble bursts, many market-naive onlookers will see the bears as fools.
        This is always the case in bubbles, not, of course, an argument against there being a bubble.

      • The classic on this front is Peter Schiff’s famous talking head spat with real estate shills a few years ago.

        The antics on RET are no different but prolonged.

      • Yeah, the Schiff clip came to my mind, too.
        I wonder if there are any specific articles dealing with examples of bear baiting during asset bubbles. It must have happened in the 1920’s run up, and it definitely happened in the dot.com boom (I saw it diffusely, but didn’t collect examples myself).

  4. “he’d have been one of the very few people who made money out of the bubble”
    What’s key to remember about the popping of the US bubble is just how few people really came out ahead. The guys who really saw it coming on Wall Street and made the right bets are so few and far between that you can tick them off on two hands. The people who sold near the top and didn’t just sink the proceeds into another overpriced house are similarly few and far between.
    When it pops, it takes everyone down, no matter how well they’ve done. The developers and flippers are stuck with that one last project they took on. It can wipe out all the gains from the proceeding years.

    • You’re absolutely right.
      It’s counter-intuitive because, when you look at the charts, you imagine it’d be easy for many to have sold/taken profits on US housing 2005, or Nortel 2000, etc. But the point is that the moment a small but significant percentage of holders (say 4-6%) try to realize their paper gains, the whole thing crashes down. The ‘wealth’ that most imagine simply does not exist.

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