For years I’ve put forth the principle of Grandpa Economics. I coined the phrase years and years ago. Stated simply — Relying on savings + a free and clear home + Social Security will land you in the poor house not too many years after your retirement party is long forgotten.
The solution? Understand Grandpa lived in a world playing by starkly different rules. Those rules haven’t applied since 1980. The template now calls for investing with a prudent, thoughtful Plan — using a long term, or big picture view. I prefer real estate. Duh. Frankly, whatever floats your boat and gets you to retirement with a big enough pot of gold, will do the trick.
As I say over and over it seems lately — nobody gives a damn how the cat was skinned, until they find out if the cat was skinned. If you hit retirement with a basket of capital/equity requiring two commas, and preferably beginning with a ‘2’ — you’ve skinned the cat. 🙂
The Boss is always on the lookout for helpful posts and articles. She hit platinum pay dirt with a story put out by AP concerning a victim of Grandpa Economics. Today I published an in depth post based on AP’s article. The post points out the empirical, what I’d say are the predictable consequences of following Grandpa’s path to retirement.
For the skeptics who often wonder why I’m so passionate about this topic, read the post and ask yourself how your own parents and/or grandparents are currently faring. I hope they’re in the ‘high grass’. If not, are they fine due to their own efforts, or because you’re steppin’ up to the plate?
I’d love to hear your thoughts, as this story is gonna become common before you know it. Grandpa Economics is creating a new class of people while we watch in real time.
Robert Kerr says:
Massive leveraging of the kind you espouse in the “purposeful plan” exponentially increases risk.
If just a few of the basic, early assumptions are off, if a life changing event occurs at the wrong time, all may be lost.
Yes, it’s true that you might cross the finish line wealthy. But a few wrong turns and you might finish the race dead broke.
But there’s no mention at all of any risk in your plan. There’s just the black/white choice: follow me and be wealthy or follow grandpa and be broke.
The truth is, it’s not that black and white.
I wish you’d acknowledge the risks inherent in your leveraging stragetgy, especially now, with a downturn underway, a downturn that could last for a decade.
January 3, 2008 — 11:16 am
Jeff Brown says:
Robert — Any of my clients will tell they are ‘massively’ schooled by me in the risk involved in what they’re doing.
You’ve set up a straw man, using a false premise to smear me, and frankly you’re boring me to death.
If you want to believe I’ve been this successful by avoiding the realities of risk for THE LAST 30+ YEARS, go ahead.
January 3, 2008 — 12:13 pm
Jeff Brown says:
Robert — Any of my clients will tell they are ‘massively’ schooled by me in the risk involved in what they’re doing. Furthermore, a large segment of my clients don’t use nearly the leverage others do — because of my advise.
I’ve run into the Robert Kerrs of the world since the 1970’s. They predicted, as you do now, total disaster. Ditto the ’80’s and ’90’s. Though many of those guys have disappeared, some are still around — they’re not quite as sure as they used to be.
Nobody can be sure about any market trend, or any market period. A pro analyzes the facts, and comes to a conclusion. He’s either right or wrong, sometimes neither. We can only behave based upon our beliefs.
Those old guys back in the day, were one act ponies, which is boring to say the least. If you think this downturn could or likely will last a decade, then act accordingly.
You’re in the minority, which doesn’t mean you won’t be proved correct. If you are, feel free to tell the world You told them so.
You do what you think is right, as others will do the same. My intuition tells me you’ve been pretty successful as a real estate investor. More power to you. It proves my point, which says — there’s more than one way to skin the cat.
You have no basis in fact to back up what you say about me. You don’t know what I tell my clients. So from now on, when there are no replies to your comments, you’ll know I’ve decided to spend my time doing something of more relative value — like rearranging my sock and underwear drawer.
January 3, 2008 — 12:31 pm
Sean Carr says:
Jeff,
Some friendly constructive criticism. Your white papers do read a little light with respect to the discussion of risk in today’s investment environment. Robert’s claim that you ignore these factors may well be unjustified but I can understand how a reader could form that perception. Also who can confidently claim, aside from Lawrence Yun (cheap shot intended), that Robert’s view point is in the minority? From a “boots on the ground” perspective as you like to say, I have been in Geneva, London, Shanghai, Seoul, Toronto, Bangkok, Penang, Tokyo, and Dubai (among others) in the past twelve months. The tension in the credit and RE markets is palpable everywhere. I have no doubt a “pro” can find some good pockets for RE investments, however it would be imprudent to overlook the possibility that today’s liquidity problems suffer further and prolonged deterioration causing increased disruption to secondary markets. Therefore we, as investors and clients, need to be hedged accordingly to mitigate the possibility of that outcome in this tumultuous environment.
Anyway Cheers and have a good New Year.
January 3, 2008 — 7:51 pm
Jeff Brown says:
Sean — Happy New Year to you too!
By minority view, I was specifically addressing the belief this ‘downward trend’ would last another decade. You and I probably agree with that assessment.
Overall, the American investor, in my opinion, appears to be relatively more optimistic than their foreign counterparts. Time will tell.
As far as the whole risk issue goes? I don’t wish to be harsh. I talk about risk to death in seminars or one on one with clients. The white paper addresses more general issues, such as how to access capital, and assumes the investor realizes there’s a reason it’s called ‘risk’ capital.
If there is a segment of the real estate investment community out there unaware of the risk involved in investing, I’ve yet to run into one.
That said — Everyone pay attention!
Investing in real estate is not — repeat — is not without risk. It is definitely possible for real estate, like the stock market, to lose as well as increase in value. When this happens — you could actually lose money.
Also — grass is green — the sky is blue — and water is wet. 🙂
In the end Sean, in a career spanning nearly four decades it would be nothing short of miraculous to have convinced investors to ignore the risk factor involved in real estate investing.
Have you read how hard I pound what I’ve coined as ‘The Sominex Account’ for God’s sake? I have, as policy, refused to work with any investor without a cash reserve that most have described as overkill. The exceptions to this policy are those with monster incomes.
Now why on earth, if I preach, or imply little or no risk, would I refuse to work with investors without massive cash reserves?
Pay attention to what I say and write, but really watch what I do with clients.
Thanks Sean, but anyone who knows me, understands what I think about risk, reducing it, and most importantly — planning for it.
January 3, 2008 — 8:56 pm
Robert Kerr says:
I’m sorry you see it that way, but there is no smear Jeff.
If your readers already know the risks, as you claim, then there is no harm in reminding them.
Think about it: You’re asking people to put their entire financial future in your hands.
You OWE it to them to fully inform them of the risks. Up front!
January 3, 2008 — 9:20 pm
Michael Cook says:
FYI,
I would be more than happy to take Jeff’s risk over a $7 per hour job when I am 70. That is borderline outrageous to me. I understand everyone makes their own bed, but forcing old people to work because they cannot pay property taxes is taking it to the next level.
Good discussion on risk as well guys. I am more in Robert and Sean’s camp here. The risk in the current environment could have a very negative affect on future pricing. On the other hand, if investors are thinking long term, this will be just another storm to weather. Thanks for posting Jeff.
January 4, 2008 — 6:16 pm
Jeff Brown says:
Michael — I was hoping you’d show up. 🙂
Risk is always two things at the very least — perception — then later, reality. Sometimes they’re the same, somtimes not. Long term is the key, and I like your ‘just another storm to weather’ approach.
A great umbrella for those storms is a Sominex Account which only exists BECAUSE of the inherent risk of real estate investing. Google the phrase and see what pops up. Risk is why old school guys like myself, preach preservation of capital before return on capital. No capital reserves often equates to a foundation of sand.
January 4, 2008 — 8:15 pm
Robert Kerr says:
Setting aside just $40K (your Sominex figure) while leaping into this RE market at this time and the way you suggest in the Purposeful Plan is very little protection.
It’s more like a baseball cap than an umbrella.
January 5, 2008 — 1:52 pm