In a previous post I commented that in times of crisis it was much better to have your investment in real assets than in government bonds. I gave the typical examples given by Bestinver managers: real assets being portions of an enterprise (stocks), chairs, and pencils, even houses…
While this is true in order to make sure you keep the value of your assets through the crisis period, it is another story when we are talking about investing as in “To commit (money or capital) in order to gain a financial return”. Then I dare to say that buying a house is no investment. When buying a house there are not goods or services produced for others in the hope of a profitable sale; so if someone buys it in the hope of realising some profit that is pure speculation.
After having said this, I wanted to share two graphics from Case-Shiller Home Price Indices for American houses since 1890… In the first graphic you can see that after adjusting for inflation at the end of the 20th century, in absence of crisis and booms the value of a house was nearly the same than 100 years before, merely 10% higher. Why should it be higher if no goods/services are produced? Then you can see the boom that took place in the 2000’s up to mid 2006. That was pure greed and speculation.
Case-Shiller Home Price Indices for American houses, 1890-2006.
In the second graphic you may see the prediction made based on Case-Shiller Home Price Index. The prediction is pretty simple: there is no reason to forecast that homes prices have to stabilise at a higher point than the average of the past 120 years… other way to say that a home does not generate any value (still, it doesn’t destroy value either!).
Case-Shiller Home Price Indices for American houses, 1890-2009 and forecast.
Some weeks ago I had two different conversations with friends. The issue: whether Greek bonds would be a good investment given the yields they are being offered at. I then argued that I didn’t think it was a safe investment, that many countries had defaulted payments, and as a value investor in the making I tried to explain that a much better investment would be to find out there some great stocks at a big discount.
I was also looking for some graphics to send them to prove the point. I had seen those graphics at the annual investors’ forum of the asset management firm Bestinver in different years. They represented how different the outcome of an investment would be for a person living either in Germany in the 1920-30’s or in Argentina in the last 15 years in case this person had invested in the stock market or in government bonds, supposedly safer.
In both cases the investment is much better off when it’s composed of stocks, as they represent a portion of a real company that continues to operate after the crisis and the currency devaluation/hyperinflation period that typically follows. The value of the investment in bonds is suddenly reduced to nearly zero… At that time I didn’t find any of those graphics in the Net, but the other day I found a similar one. Here it goes (note the scale is logarithmic):
Stocks vs. Bonds, 200 years comparison.
Please, note the difference especially between German and Japanese bonds and stocks. But also with US and UK stocks and bonds the difference persists.
The managers of Bestinver year after year repeat the same example: in those situations is much better to be invested in real assets, be it portions of an enterprise (stocks), chairs, and pencils, even houses… all these are assets that once the crisis is over will retain the value they have. However the paper money has no value once the nominal value is devalued.