Dumb Money Follows Smart...

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By Glockenspieler
June 7, 2005

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A little story for y'all.

We bought our current house in an inner-ring Detroit suburb five years ago from a guy I'll call Matt. We got to know him afterwards at neighborhood parties and let's just say that although he is really nice, he is not the brightest bulb in the marquis.

At closing, when I arrived with a fat check in my hand, so did he. Although he had owned the house for 10 years and it had doubled in value, he had to bring money to the table. At the time I was dumbfounded -- Where did all of that money go? He was a bachelor with a decent job as a loan officer. Five years ago, I had never heard of anyone draining the equity in their houses to buy anything, much less stocks, but I later learned that he fancied himself quite the trader. He also told me that selling the house had drained him financially. Dude! I wanted to tell him: if you'd just cleaned up the place you could've gotten 20 grand more!

Our neighbor, who thinks Matt hung the moon, would tell us how rich he was. True to form, Matt bought his fianc� a HUGE rock and moved into a HUGE house (using the equity from her house) full of HUGE furniture. A year later, during a friendly neighborhood gossip session, I was informed that Matt and new wife moved to another house because the first one was "just too big." So, he had already dug his next financial hole.

This guy resurfaced again last week in our neighborhood with a new SUV. Afterwards our neighbor informed my husband, with stars in her eyes, that Matt had quit his job with the bank. "Stop right there!" I said to DH, "Don't tell me -- he's flipping houses!" Yes, indeed, Matt is apparently making "loads" of money "buying and selling real estate" while he has moved himself and aforementioned wife into a rental house.

I have no idea how many houses he's actually sold or how leveraged he is, but Detroit is not exactly hot right now. In fact, it's the 7th worst metro market to be in. I've been obsessed with this market for a couple of years, and it hasn't been pretty out there for about a year. I'm sure that our own house has topped out, and it's in one of the few "hot" areas (Hot being relative. Let's call it warm).

"Darlin'" I said, "I have some easy investing advice for us. We are going to keep in contact with Matt, and whatever he gets into, we are getting out of immediately." Call us hopelessly old-fashioned, but we are both happy working in (and on) real businesses that actually produce something.

Duck and cover!


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