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Roundtable: What Some Investors Never Learn

Today, we want to highlight the financial equivalent of sticking your finger in a socket repeatedly, of getting back together with that ex all your friends hate, of going to the theater on opening night to watch Charlie's Angels: Full Throttle after paying to see the original.

We're now nearly three years into the financial crisis. I asked some of our top analysts this question:

What's one lesson investors still haven't learned?
Here are their answers.

Morgan Housel, Fool contributor
The mass delusion that homeownership is forever and always something to strive for still seems alive and well. This is unfortunate, since the cult of ownership was a major cause of the bubble.

A recent Fannie Mae (NYSE: FNM  ) survey showed that 80% of the population thinks a high homeownership rate is important for the overall economy. Put me firmly in the other 20%. Not only does homeownership hamper labor mobility, but striving for high ownership typically means coercing people into homes who can't afford them. What you want is affordable homeownership, which inevitably means lower homeownership than we currently have.

From the same survey, 60% say a major reason for owning is that it's a good retirement investment; 61% say it's a good way to build wealth; 79% say a major reason to own is having a physical structure where you and your family feel safe.

I beg to differ on all of these. Owning outright can provide a good retirement living situation, but to say it's a good retirement investment (implying pulling cash out) is scary, since you can usually only pull out equity when prices are rising, which makes it easy to become "underwater" when prices fall. Owning can be a good way to build wealth, but leverage makes it one of the easiest ways to lose wealth too. And, seriously, rental homes have locking doors, insulation, and fire alarms. They're pretty safe.

People who can afford it should buy. Everyone else should rent.

Alex Dumortier, CFA, Fool contributor
Investors often allow greed and fear to trump their intellect. It has always been this way and I expect it will always be this way.

Investors have embraced a strategy of "buy high, sell low" during the credit crisis. For example, they added $5.3 billion to domestic equity mutual funds in April, during which the S&P 500 hit a 19-month high. As equities corrected in May and got cheaper -- they turned around and withdrew over $20 billion in assets from equity mutual funds. Stocks' underlying value is less volatile than stock prices; investors should prefer stocks in May at an average price that is 6% lower than in April.

As we get closer to fair value -- stock valuations got ahead of themselves during the monster rally off the March 2009 low -- the SPDR S&P 500 ETF (NYSE: SPY  ) becomes more attractive, not less so. In a rational world, investors should be increasing their exposure to stocks as valuations come down.

Tim Beyers, Fool contributor and Rule Breakers analyst
After three years of a debt-fueled financial crisis, investors still treat the balance sheet as if it were the Rodney Dangerfield of financial statements. Is cash really worth so little?

Apparently. If it weren't, cash-rich tech behemoths such as Google (Nasdaq: GOOG  ) wouldn't be so unloved. As it is, The Big G, which had $26.5 billion in cash and investments and no debt as of March 31, has badly underperformed the broader market so far during 2010.

Allow me to borrow a phrase from my friend Hewitt Heiserman Jr., author of It's Earnings That Count and co-developer of our market-crushing Scrooge Portfolio. Here's what he says about the balance sheet: "I think one of the great lessons of the late '90s is that investors forgot about this and the rest of the balance sheet."

You know what followed the dot-com delirium. "Businesses" with nothing in the way of assets disappeared from view, wiping out trillions in wealth. Years later, Lehman Brothers went so deep into hock that it went bankrupt at the first sign of trouble.

Stocks are dangerous enough, especially now. Why bet on any company that's in danger of having its chips called in by creditors?

Rick Munarriz, Fool contributor and Rule Breakers analyst
After watching financial stocks and homebuilders rally over the past year and change, I'm convinced that investors believe that every stock -- and every industry -- has a birthright to a turnaround.

It's never as easy as that. Banking is unlikely to ever be the same, so expectations should be tempered accordingly. We're at least several years away -- if not longer -- from a legitimate need for new housing developments, so why bank on the builders of condo towers or suburban builders of cookie-cutter communities?

Shares of developer Lennar (NYSE: LEN  ) have more than quadrupled since bottoming out 19 months ago, even though it's still losing money.

Tennis balls bounce back when they drop, but we live in a world where there are also several eggs that don't.  

Matt Koppenheffer, Fool contributor
The answer here is easy -- don't run with the crowd! Whether it was the dot-com boom, the housing mania, the financial meltdown, or the more recent European crisis, investors all tended to run in a big herd in the exact same direction.

In some cases it's hard to argue with the reaction of the masses. When the financial world was melting down, investors clearly had Citigroup (NYSE: C  ) marked for bankruptcy. With the benefit of hindsight we could look at the (relatively) more stable Citi today and the massive gains its stock has seen and say it was all an overreaction. But without a very healthy dose of government intervention, I'm not so sure that we'd be looking at the same outcome.

But what about global consumer goods giant Unilever (NYSE: UL  ) ? It didn't need any government bailout -- in fact, far from it. On the back of major brands like Lipton, Dove, and Surf, the company remained very profitable through the crisis and continued paying dividends to its investors just for sticking around. Yet investors let this stock trade down to a price-to-earnings ratio of 7.4.

This, of course, will never change and most investors will continue to move with the herd. But for Foolish investors [who] keep a clear head on their shoulders through both euphoric and panic-stricken times, everyone else's herd-like mentality can create significant opportunities.

We've cautioned you on five financial mistakes to avoid. Add to our list in the comments section below. Or take a look at our previous roundtable, where we put some popular stocks in rank order.

Google is a Motley Fool Rule Breakers pick. Unilever is a Global Gains recommendation. Unilever is a Motley Fool Income Investor pick. Try any of our Foolish newsletters today, free for 30 days.

This roundtable article was compiled by Anand Chokkavelu, who owns shares of Citigroup. The Motley Fool has a disclosure policy.


Read/Post Comments (11) | Recommend This Article (32)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 21, 2010, at 6:46 PM, ThriveCounseling wrote:

    This article makes a lot of good points about human psychology. It's impressive how emotion seem to play as much a role in investing as investment skills. --www.atlanta-counseling.com

  • Report this Comment On June 21, 2010, at 8:50 PM, xetn wrote:

    Regarding home ownership, Freddie and Fannie are now the largest homeowners:

    http://blog.mises.org/13032/real-estate-magnates-fannie-and-...

  • Report this Comment On June 21, 2010, at 8:59 PM, busterbuddy wrote:

    So here is my reply to "The mass delusion that homeownership is forever and always something to strive for still seems alive and well. This is unfortunate, since the cult of ownership was a major cause of the bubble."

    Ok the Grandson of Mr. Potter from "A Wonderfully life". You just want everyone to be poor and uneducated so you can force them to rent and live in your slum houses.

    Home ownership is a solid foundation of the economy but liars, thieves and Those in Congress who encourage it are the problem not home ownership.

    Your one of the kill the butterflys.

    Do what?

    Oh here's the butterfly story. Someone found a correlation between Butterfly migration patterns in Mexico to the number of Hurricanes in the Gulf Coast. So the liberals decide the solution to Hurricanes was to kill all the Butterflies thus no more Hurricanes.

    So your a Kill the butterflier.

  • Report this Comment On June 21, 2010, at 11:04 PM, DonkeyJunk wrote:

    I can't even begin to understand busterbuddy's post about why congressmen are bad for encouraging home ownership, but home ownership is great, but something about liberals killing butterflies (that sounds like something liberals would do) is related to them somehow trying to disrupt home ownership. It's too bad, because I want to get the point.

    "It's a Wonderfully Life"? "Do what?" This post reads like an English as a Second Language student's autocorrect gone haywire.

  • Report this Comment On June 21, 2010, at 11:33 PM, MyDonkey wrote:

    I second DonkeyJunk's sentiments.

  • Report this Comment On June 22, 2010, at 8:02 AM, p22481 wrote:

    All right!, I'll say it. Gee, I just discovered the reason of owning a home is so I don't have to dig a cave for shelter.No more will I have to dig and then move on to wherever the hunt takes me. Now I just buy just what I can afford. What a great feeling it is. Oh, by the way, I just realize I don't have to modify the wheel, isn't it wonderful? I'm just coming full circle in my worldly knowledge. I can't thank the school system enough for my rapid advancement in common sense. Now I understand why my grandfather always told me to find high ground and dig in a soft spot.

  • Report this Comment On June 22, 2010, at 8:17 AM, ragedmaximus wrote:

    the stock market is like an ied ,when it blows up in your face your dead or maimed. it's only natural to sell a stock at a loss cause all stocks are worth nothing zero zilch nada they are made up ways for wall street to seperate us average joe from our hard earned money and this has to be the worst market ever in history with crash flash crash world debt but with the lure of one day striking it rich we stupid sheep (wall street quote) will come back again and again to lose all our money on wothless stock lotto tickets,hell i lose even when i bet against the market. one thing i know it's alot harder for a stock to go up than down and every day some positive or negative news gives or takes your money.ko is looking really goood about now...

  • Report this Comment On June 22, 2010, at 11:28 AM, Deepfryer wrote:

    "From the same survey, 60% say a major reason for owning is that it's a good retirement investment; 61% say it's a good way to build wealth; 79% say a major reason to own is having a physical structure where you and your family feel safe."

    I think it improves your quality of life by giving you more room for all your stuff, a backyard where you can grill some burgers, pool table in the basement, etc, etc. It's just a lot nicer than living in an apt.

    And I think reasons #1 and #2 are just misworded, as opposed to being "wrong". A home isn't an investment where you can expect to "pull money out". Rather, a home is a good investment because it helps you save money. Isn't it better to buy a home and be done with your payments after 30 years (or less)? That's much, much cheaper than paying rent for your entire life. Rents only go in one direction: up, up, up. So I certainly don't want to have to worry about paying rent each month when I'm 85 years old.

    So, I think of home ownership as a great investment, not because I can "pull money out", but rather because it will help me save massive amounts of money over the course of my life.

  • Report this Comment On June 22, 2010, at 1:25 PM, moda0306 wrote:

    Deepfryer, I can't disagree with some of your points, but if you're paying more for a mortgage than renting, not to mention repairs, taxes, higher utilities, furnishings, maintenance, lawn care, time etc. durin that whole 30 yrs, it's hardly cheaper than living in an apartment and investing the difference, then diverting some of that principal/income after those 30 years to rent payments. The "hate throwing money away at rent" crowd doesn't realize that a place to live is an expense no matter what, it's a matter of where you're throwing your money, not if you're throwing it at something.

  • Report this Comment On June 22, 2010, at 3:45 PM, TMFKopp wrote:

    @Deepfryer

    "I think it improves your quality of life by giving you more room for all your stuff, a backyard where you can grill some burgers, pool table in the basement, etc, etc. It's just a lot nicer than living in an apt."

    You do realize you can rent a house right?

    Matt

  • Report this Comment On June 25, 2010, at 4:53 PM, freemanskrybe wrote:

    Friends, countrymen, Fools...

    The article did NOT draw a line in the sand: homeowner bad; renter good.

    It clearly states, " People who can afford it should buy. Everyone else should rent."

    In fact, it is the closing sentence. Somtimes we have selective hearing. It can be the same with reading. I find the message to support arguements on both sides....in fact....I don't really think there are sides. We are looking for some common ground here, right?

    -Brad

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Anand Chokkavelu
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Anand is the Editorial Director of Fool.com. He loves pithiness, clever turns of phrase, and analyzing the banking sector. You can follow him on Twitter @anandchokkavelu

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