Page 163 - Psychology of Money - Timeless Lessons on Wealth, Greed, and Happiness-Harriman House Limited (2020)

COBACOBA
By the mid-nineties, the press had replaced annual scorecards with reports
that appeared every three months. The change spurred investors to chase
performance, rushing to buy the funds at the top of the charts, just when
they were most expensive.

This was the era of day trading, short-term option contracts, and up-to-the
minute market commentary. It’s not the kind of thing you’d associate with
long-term views.

The same thing happened during the housing bubble of the mid-2000s.

It’s hard to justify paying $700,000 for a two-bedroom Florida track home

to raise your family in for the next 10 years. But it makes perfect sense if
you plan on flipping the home in a few months into a market with rising
prices to make a quick profit. Which is exactly what many people were
doing during the bubble.

Data from Attom, a company that tracks real estate transactions, shows the
number of houses in America that sold more than once in a 12-month
period—they were flipped—rose fivefold during the bubble, from 20,000 in

the first quarter of 2000 to over 100,000 in the first quarter of 2004.⁵⁴
Flipping plunged after the bubble to less than 40,000 per quarter, where it’s

roughly remained since.

Do you think these flippers cared about long-term price-to-rent ratios? Or
whether the prices they paid were backed up by long-term income growth?
Of course not. Those numbers weren’t relevant to their game. The only
thing that mattered to flippers was that the price of the home would be more
next month than it was this month. And for many years, it was.

You can say a lot about these investors. You can call them speculators. You
can call them irresponsible. You can shake your head at their willingness to

take huge risks.