During the late 1990s, the traditional stock market changed dramatically. Traditional P/E ratios increased to 50 or more times earnings, with seemingly no upper limit. People no longer purchased stocks with the expectation that they would get an annual return on investment. They counted on the “bigger fool” theory to make money. This theory rests on greed as well as supply and demand, overriding investment considerations
and turning people into speculators rather than investors. A modern-day holder of stock is counting on someone else to come along who will pay more for the stock than he or she did. Due to this increasingly insatiable demand for a place to put capital, the stock market of the new millennium has dramatically reflected the bigger fool theory.
In the new millennium, investors got a harsh
awakening as they started to realize their
stocks had become dramatically overpriced.
The resulting bear market has helped to
In the past, the price
evaporate many a paper profit. The daily paid for a share of stock was a
volatility and lack of clear direction of the stock multiple of its per-share earnings.
market are indicative of this increasingly preva-The price-to-earnings ratio, or
P/E ratio, is the price divided by
lent, unsound reasoning when buying and sell-
the earnings per share, either
ing stocks. Ironically, the stock market does not proven or projected.reflect the real health and competitiveness of the companies involved. The country’s industries
are in great shape, cycles included; it’s just that their stock value needs to be put back into an investment mode. Once we return to a real and sustainable P/E ratio, stocks will again become a viable alternative investment. People working in the market
are constantly trying to hype the market values, but since the readjustment, stocks in the Dow Jones Industrial Average have been up an down between 10 and 11,000, with no appreciable long-term gain.
When individuals want to go back to being legitimate investors, they must take a good look at real estate as an investment; it still trades on a multiple of cash flow to establish value. It retains the added attraction of appreciation, with the interim tax benefit of depreciation. In short, it is a more constant and reliable vehicle for investment.
In some cases, it can be a vehicle for speculation as well. One very poignant advantage that real estate has over stocks and other investment vehicles is that it is a finite commodity. Other than volcanic eruption at sea, there has been no real estate created for several million years. The continued growth of the world’s population virtually
ensures appreciation as the available land is absorbed.
Real estate investment can give you monthly income, tax shelter, and long-term appreciation. The stock market used to provide only income and appreciarion,
today it has lost sight of the fundamentals of value. Real estate is easy for most people to understand. Not only can you make money with it, but also you can see it, change it, and use it. You live, work, and play in it. It surrounds your entire life. Unless you are a cave dweller, you cannot go through a single day without using someone’s real estate investment. Why not make it one of yours?