Chuck Ponzi December 6th, 2005

It would be difficult to spend any amount of time discussing housing prices without discussing the “house as an ATM” phenomenon. An interesting piece came out recently in the San Diego Union Tribune titled House can lose big if owner gambles with fickle markets.

I had expected by the title that it would be another ho-hum piece about how buying at the top of a market could be financial ruin, blah blah blah. I was completely surprised to find it was more about investment advice - for those using the House ATM.

Some of the findings of this journalist is that an expected 11% of cash-out refinancing dollars find their way to stock market investment. She derides these investors as “(hoping) to emulate Warren Buffett or perhaps Jim Cramer, the hyperkinetic host of a CNBC stock trading show.” Her decision? “It’s not hard to think of reasons why you should avoid exchanging your home equity for a pile of poker chips.”

She concludes that those “counting on the (investment) to generate enough money to meet their monthly mortgage obligation” could end up losing their home.

I have a problem with some of the issues she takes for the following reasons.

1. A house is not an “investment”. Never was, never will be. But, even if you see it as such, what’s wrong with a diversified investment portfolio? Isn’t that what most investors should be doing? Is she suggesting that keeping all of your assets (or a major chunk of them) in your house is the smarter move? Yes, investments go up and investments go down, but smart investing, like smart homebuying, is a long-term strategy.
2. OK, so 11% of refinance money goes to investments. So… 89% goes towards consumption? Alright, I know that’s a bit steep, but even if a full 50% goes to house remodels (most of which are excessive, but we’ll assume they increase the value of the home some), that means that the 39% remainder are going towards consumption of “other” goods & services. That’s 3 times the amount she is worried about going into the stock market. She seems like she’s swimming upstream with this one. It’s like the pot calling the kettle black.
3. Since when was the stock market equal to “a pile of poker chips”? To non-savvy investors, yes, it seems scary and daunting when the Nasdaq loses 80% of it’s value. But, if you believe that investments are akin to poker… you should probably be stuffing your mattress with gold and hoarding guns. Companies with cash flow do have intrinsic values.
4. How dare you mention Warren Buffett and Jim Cramer in the same sentence? Have you no sense? It like comparing a rock with an ostrich. Their investing styles are as different as sausage and Uzbekistan.
5. If you are counting on an investment to throw off enough cash flow to offset your expenses, you really need to go with a lower-risk investment than a stock fund, and you likely will not exceed the hurdle of the cost of your debt. I doubt that she is an investment advisor, though, and would understand the implications of risk/reward in the stock market, since everything is “a pile of poker chips” and you are “betting against the House”.
6. While I admit that I agree with her that borrowing to invest is the wrong way, she comes to this conclusion with fear mongering and disinformation. She is attempting to scare people away from investing at all because your risk losing money. Yes,… well,… that’ s the nature of investing. While there is no such thing as a “no risk” investment, you could always look into low risk investments like Government bonds.

Investing in companies via the stock market can be the smartest decision of a lifetime. Any research into the work of Warren Buffett would show you that risk can be moderated and returns can be quite good with smart value investing. Fear, however, is the enemy to value investing.

However, this wasn’t about investing was it? So, which is the worst decision?

1. Borrow against your home to spend on vacations, cars, or other consumer items?
(you will rarely get anything returned)
2. Borrow against your home to spend on home remodels
(Historically, this has not resulted in increased home values greater than the cost)
3. Borrow against your home to invest
(Historically, this returns 8 to 12% annually)

You decide.

Or, is there a fourth option?

4. Don’t spend more than you make? Is this possible
(Historically, you get all of your money back with this one)

When faced with these options, personally, I consider #4 best with #3 second best, then #2 , and would never consider #1.

Should we really be worried about investments when most of the time people are choosing returns below the 0% mark?

• Uncategorized