It is often said that the absolute best time to buy is when “there is blood in the streets.” The primary problem with this age-old Wall Street adage is the only way to tell if your particular buy point was good is with a healthy dose of hindsight.
For example, I personally know many investment professionals who advised their clients to buy during the summer of 2008 and again that fall as Lehman, Merrill, Citi, and AIG were about to fail. To be sure, these financial advisers are not dumb and each had at least a decade of experience under their belts at the time. The problem was that these advisers were children of the buy-and-hold era, where your only job was to buy the “dips.”
However, sometimes a dip is more than just a dip before the next major advance. Sometimes the dip is part of a larger – or secular – bear market, that may last for a decade or two. Thus, sometimes buying when there is blood in the streets isn’t exactly the best idea.
On the other side of the coin though, those cautious investors who decided to wait for the economy to show signs of life before buying stocks have likely missed out on the majority of a monster rally. And in short, it is for this reason that the average investor isn’t rich. The declines shake them out on the way down and then they wait for “proof” that everything will be okay before jumping back in.
Thus, it is vital to understand and define what type of investor you are and what type of game you playing. For example, if you are a very long-term investor, then buying when the blood is flowing in the streets (and then again on each and every dip) is probably a great way to play. Assuming, of course, you can handle the game from an emotional standpoint.
Warren Buffett might be the poster child for this approach. In all honesty, the Oracle of Omaha didn’t look very bright when he put a boatload of cash into Goldman Sachs during the credit crisis. Goldman’s stock continued to fall and Mr. Buffett’s investment (which pays him a 10% coupon rate) looked like a pretty bad move – especially as the stocks broke below $60 per share.
However, while the blood continued to flow and Buffett probably felt pretty silly for a while, things look entirely different today with Goldman’s stock north of $180. So as a long-term investor, you have to be prepared to “look dumb” at times.
With stocks up nearly 80% from their March 2009 lows, the argument can be made that the blood in the streets has been cleaned up and happy days are here again. Thus, many investors are looking around for other opportunities – like real estate.
So, with the economy on the mend and the housing market looking like it might survive, is this the time to start buying real estate? While it isn’t exactly a trading vehicle, PIMCO’s Bill Gross says that real estate may eventually be a better bet for investors than stocks and bonds – over the long-term, of course.
Gross, who is the Co-Chief Investment Officer at PIMCO – the largest manager of bonds in the world – told CNBC on Thursday that both residential and commercial real estate might be reaching a bottoming point. Gross went on to suggest that these markets might even be prepared to move higher.
Gross figures that with stocks likely to return just 5% to 6% over the long term and bonds yields likely to be only 3% to 4%, investors might be wise to start looking at real estate as an opportunity.
"Ultimately the riskier assets will be the less risky assets," Gross told CNBC. "I wouldn't suggest moving into those particular sectors at the moment but ultimately risk and reward go together."
So, if you are looking to be like Buffett and you don’t mind “looking dumb” for a while, now might be the time to start nibbling in the real estate market. The blood is definitely still flowing and many analysts project the commercial real estate will become the next big problem. However, this is exactly the way things feel at market bottoms: ugly.
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