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Buying into Fear

It was interesting to see a Barron’s article online recently about fear about the stock market. The article explained that one woman with over a million dollars in stocks sold it all and is sitting on cash right now, sick of the volatility in the markets.

What’s really interesting is that the article has the headline “Be more like Buffett: Buy Fear.” Warren Buffett, of course, is the expert investor who says to be greedy when others are fearful and fearful when others are greedy. With the volatility in the stock market right now, investors certainly are fearful. And Buffett is buying.

Market Fear

But most people can’t bring themselves to heed Buffett’s advice. They think it sounds good, but they can’t quite pull the trigger on investments with so much fear surrounding them. They buy into fear, but not in the literal way Buffett means!

It’s the same way with real estate. In fact, you could substitute “real estate” for “stocks” throughout the article, and in many cases, the gist of the story wouldn’t change. Stocks are cheap right now, just like homes. They appear better as long-term investments right now, just like real estate. And people aren’t buying because they’re scared, just like real estate.

It doesn’t take much to see the logic in Buffett’s greedy/fearful strategy. It does take guts, however, to actually employ it.

But the last couple of years have been a great time to buy real estate, and those who have had the guts have been rewarded. Just like a stock that pays great dividends no matter what, real estate pays even without the kind of appreciation we saw in the early-to-middle part of the last decade.

Investment properties are cash-flowing now like no other time I’ve seen – thanks to low prices and low interest rates. And cash flow is providing returns on investment that are fantastic for this economy, and they are returns that don’t rely on appreciation.

Some investors get that, and are buying. Others probably don’t get it. And others DO get it but aren’t moving because of fear. They are simply on the wrong side of the fear. Buying into the fear itself, not buying into the benefits the fear is providing.

It’s understandable. What happened with real estate in the past decade is unlike anything we’ve ever seen before. It created a sense of the unknown going forward, and the unknown scares people.

I have a friend who, years ago, had the basement of his new house flood. It was traumatic, a horrible experience, even thought it was an unfinished basement. It was a particularly nasty storm, and the sewer problem that caused the flooding was quickly fixed. The county told him it was a once-in-a-lifetime incident. But for a couple of years, whenever there was a hard rain, he constantly checked his basement – to the point where it kept him up some nights, running up and down the stairs.

But a couple of years ago, he finished his basement – putting in a much-needed playroom and also a home theater. Some of his neighbors were shocked. They kept telling him that they would never finish their basements. They were too afraid. I asked him about the decision, and he said:

“It was something we always meant to do when we bought the house, and the only thing that stopped me for a while was fear. I just stopped letting fear control me.”

I’m not saying investing these days – in the stock market or in real estate – is the same thing, but the story illustrates that it’s worth the effort to look at why you aren’t investing. Is it fear? If so, is it a rational fear, such as a concern you’ll lose your job. Or is it a less-rational fear that’s controlling you, such as panic caused by the headlines you read or the predictions the “experts” make? Is it fear caused by what your neighbors are saying?

When it comes to investing, fear influences the market without question. But you have to ask yourself what influence fear has on YOU.

By Jack Sternberg

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