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This is one of the more informative books in the series. It is intelligently written and well-delivered. So, it pains me to say this as an auditor, contributor, and direct author of many dry and painful reports myself that this book is not an entertaining piece of literature. I would suggest A Random Walk Down Wall Street in that regard. What the latter lacks in brevity, it makes up for with levity.
Further, in full disclosure, unlike some other books in our review series, this one does not set out to teach you how to be rich. Instead, its premise is to make a strong case for avoiding the financial mistakes of others by avoiding Irrational Exuberance. In this effort, it is successful.
The Case Against Irrational Exuberance
With “recession” rumors whispering upon the financial winds this month–and all over the news headlines because if it bleeds it leads–it is ironic that I just wrapped up my read of Irrational Exuberance. However, I guess I could make this same observation almost any week of any month of any year, because there will always be an economist somewhere screaming about the next recession just like there will always be an eager editor one headline away from when the market drops a few points ready to hit publish on their pre-contrived post containing observations no one can prove or disprove with a stock photo of investors looking sad on the stock market floor.
Irrational exuberance is the psychological basis of a speculative bubble. I define a speculative bubble as a situation in which news of prices increases investor enthusiasm, which spreads by psychological contagion from person to persons, and, in the process, amplifies stories that might justify the price increase and brings in a larger and larger class of investors, who, despite doubts about the real value of the investment, are draw to it partly through envy of others success and partly through a gambler’s excitement.
Sound familiar? It should. Because this is what the stock market does on a daily basis. Ignorance is truly bliss.
I used to think people on TV were paid way more money than myself to discuss the stock market because they were qualified and generally knew what the hell they were talking about. I was gravely mistaken. Over time, I have come to realize that most TV personalities who “predict” the stock market are no more accurate than weathermen who predict rain on sunny days.
I assume their theory is if you predict it will rain long enough, then you will inevitably be proven right because of the statistical probability that one day it will in fact rain, again. Or maybe even when they are obviously wrong, they actually did believe what they are saying while they were saying it. I don’t know which reality is more frightening to accept.
Still, is one really clairvoyant because of their proven ability to repeat themselves even when they are wrong up until they are eventually right? That is too meta for me. I’ll leave that up to others to decide for themselves. At the end of the day, I respect the game and the hustlers who play it. Marcus will never hate the player.
Your Home May Be an Investment But It Is Not The Best Investment
Recognizing my own bias here as a non-homeowner who isn’t even in the market to buy (ever?), I was especially interested in the investment analysis on homeownership presented in the book.
[home] prices up 48% in 124 years from 1890 to 2014, or .3% a year was not impressive. Why then do so many people have the impression that home prices have done so well? I think that, since homes are relatively infrequent purchases, people still remember the prior purchase price of a home from long ago and are surprised at the difference between then (when prices, including consumer prices in general, were lower) and now.
To summarize, a home is a good investment. I have heard it better explained as a forced savings account, for those who struggle to put money into a savings account, but it is only a decent investment growth vehicle for most individuals, notwithstanding those few that are fortunate enough to time their regional market in growth.
It is, of course, easy to view a home as profitable if you only look at the price to purchase and the price to sale, if you conveniently ignore any related interest, home repair costs, fixed inability to move when you please for work or other opportunities, closing costs, and a number of other facts and figures renters will never have to think about? Well, yes, a home is an awesome sunk cost.
While there is some uncertainty about the actual path of home prices, most of the evidence points to disappointedly lower average rates of real appreciation of most homes. … Based on these trends, owner-occupied housing is looking like a bad long-term investment relative to the stock market despite the occasional volatility of real estate, nationally it has offered practically no capital gains for long-term investors.
To be fair, there are many perfectly logical reasons to buy a home. It’s just that few of those reasons are the ones ever presented in arguments about home-owners versus renters. If you want to secure a stable, consistent place to race your family and know where you are (most likely) to sleep every night for the next 15 to 30-years. You should definitely buy a home.
That is a smart and prudent decision. If your premise is that homeownership is the foolproof, inarguable best investment on Earth, then you are inaccurate, friend. You would be using your opinion and personal experience to argue as facts, rather than using the actual facts to inform your opinions. In the end, the argument for renting versus buying is neutral because there is no one correct answer.
I’m sure this will do nothing to end the debate.
Most people are well-advised to buy rather than rent the homes they live in. … There is no way to put a dollar value on the psychic benefit one gets by owning and living in one’s own home, as against the psychic costs one incurs by having to take care of it. … Thus, there is really no way that one can say authoritatively which has been the better investment historically, homes or stocks. The answer differs across individuals, and is ultimately a matter of taste and circumstance.
In my opinion, informed by others so it is not an original, you don’t get rich because you own a home. You get rich because you own home(s) that other people pay you to live in. Perhaps the nuance here is that there is a simple but critical difference between owning a home and investing in real estate. For clarity, if you pay your own mortgage, it is a liability. Only if or when someone else pays your mortgage, or you own your home outright is it, in my humble opinion, truly accurate to consider it an asset. As an aside, please start the but I’m ‘building equity’ debate when only about 1 in 5 Americans ever pay off their home.
I guess this is just the hill I will die on. Let’s move on.
I will keep this section short because I believe, correctly I hope, that few people need further convincing that the media is not meant (solely) to inform. Like any business looking to sustain itself, the media exist to perpetuate the existence of the media. This is not necessarily a bad thing as long as you are aware that the media does not exist for the sole purpose of informing you. Accuracy is secondary to getting the news to your first, even if it is the wrong news. That’s just the price we pay for a 24-hour news cycle when there is only 1-hour of real news to cover in any given day.
The news media have shown a tendency since 2000 to dramatize the “new records” set in stock markets in 2007 and 2014. But, in fact, these post-2000 booms were not record setting.
The media exist, as any business must, to ensure people continue to return. I believe “fake news” is a misnomer in that the media does not necessarily perpetuate news that is false, it perpetuates news that gets clicks. Sometimes, are often times, just because a headline or story generates clicks does not mean it is the most relevant facts that you need to know. For this, I do not blame the media. The media is a reflection of us, the people who click. In essence, we get the news we deserve so in some ways, we have no one to blame but ourselves for the results. That said, when it comes to financial news or financial pr0nography, you should, at a minimum, keep the following in mind as you click the next headline placed in front of you by an algorithm.
The news media are in constant competition to capture the public attention they need to survive. … The news media are naturally attracted to financial markets, because, at the very least, the markets provide constant news in the form of daily price changes. Nothing beats the stock market for sheer frequency of potentially interesting news items. … It is no accident that financial news and sports new together account for roughly half of the editorial content of many [media] today.
What You Don’t Know About Investing Will Hurt You
In Conclusion: Irrational Exuberance correctly and convincingly proves, again, that no one really has any foolproof idea what the stock market will do from day-to-day, and at any given point no one seems to know if the market itself is priced too high or too low. Instead, it is a collection of informed opinions making informed guesses at what will happen. Some are better than others. Most are worse than average. Then there are a collection of people who irrationally invest, trade, and pray based on how they feel. Feelings, it seems, are the most unpredictable yet most rational explanation behind why the market fluctuates so wildly from day-to-day or year-to-year. Put another way, the market is irrational, because it is made up of and based on the actions of irrational beings.
Technically, you probably didn’t need a book to convince you that people do things that do not make sense. However, if you did, you could do much worse than Irrational Exuberance.
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