“You don’t want a capital market that functions perfectly if you’re in my business.”
Posted by cmcgroup on April 23, 2008
The cover story in this month’s issue of Fortune (April 28, 2008) has a cover picture and quote from Warren Buffett: ” You don’t want a capital market that functions perfectly if you’re in my business.” He is in the business of investing and investors make money when assets appreciate in value. Buy low, sell high. Investors make more money when they make investments that have less competition. Competition for an investment drives the price up. So in the article he said you should “get greedy when others are fearful and fearful when others are greedy”. That means when other investors are hesitating and backing away from an asset, and you decide that the asset has good long term potential you should go for it. When other investors are rushing to invest in an asset, the long term potential will be reduced because the demand for the asset will drive up the price and you won’t be able to buy low. So be fearful of competing with greedy investors. This applies to housing in this buyer’s market. If you find a house in a good location and the price is OK, and you will live in it or the house has good rental prospects, and you have good credit to pass muster with very today’s picky lenders, consider buying it. Even if prices decline a bit further, you’ll be able to benefit from ownership of the asset and housing values will rebound in the future. Compare this strategy to waiting until everyone knows the market has hit bottom. Then the pent up demand will create another competitive demand frenzy and you’ll be hard pressed to get the house you want. What’s worse than buying a house and watching the value decline some more? Not buying a house and not being able to buy at a reasonable price because of more qualified or more active, competitive buyers in the market bidding over the asking price. When people pay over asking price they are counting on market appreciation to rationalize their decision. Expecting, even counting upon market appreciation over the rate of inflation (3-5% per year, hopefully) is the mind set of the greedy investor.
Markets exist because people have different needs and investing philosophies. Markets don’t function perfectly for many reasons. For one thing people make decisions based on imperfect information. And they have different tolerance for risk. In the mortgage market there is considerable regulation and more is being discussed. Imagine what might happen if the consumer became more knowledgable about rates and terms?
Could knowledgable consumers with perfect information become the driving force for the mortgage market to become more accountable and efficient, offering long term credit cheaper, faster, better?
