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Understanding “Marked to the market” is the key to long term wealth

Have you ever been in a situation where your neighbor tells you what their house is worth and the number seems outlandish, but you didn’t question it?

 

 

The reason you can’t prove they are wrong, even if it sounds crazy, is likely that they haven’t tried to sell their house – and your other neighbors haven’t either in some time. Nobody actually knows what the market is…. Because real estate isn’t “marked to the market” like stocks are.

 

 

This is where the mental struggle gets us all. 

 

 

People always historically believe they do better with Real Estate versus the stock market because they buy a home, keep it for an extremely long time, then sell it at what on paper looks like a massive gain. I’ll use an ironic example of this that get’s tossed around on Warren Buffet’s housing situation.

 

 

Warren Buffet bought his Omaha, Nebraska home for $31,000 in 1958. Today it is worth an estimated $652,619.

 

That is a net gain of $621,619 over 61 years.

 

Think that sounds good?

You are WRONG.

 

Had you invested the same $31,000 in a broad market index for the same time frame, the end result would be…….

 

$4,014,999.39

 

But you would have likely never done that because of all the ups and downs along the way a market has. The housing market wasn’t steady either, but you couldn’t log on your phone and see it go up/down daily to give that anxiety.

 

 

 

By the way, I did a simple compound interest calculator using an average 8% return for 61 years. The true market return since inception is closer to 10, which would have yielded around 13.5M, but that’s not the point of this exercise is it?

 

 

 

Don’t get me wrong, I’m not saying Real Estate is a bad investment. Other than the use of leverage to magnify returns, it also has the advantage of not being marked to the market. What I am trying to say here is though, that secondary advantage is a purely psychological one which should have no place in an astute investor’s long term behavior. But it usually does, and I’m not immune either to be honest – which is why I found it worth discussing.

 

 

On a recent Tim Ferriss podcast he had the famous financial advisor Peter Mallouk on (click here to listen to that phenomenal conversation) and one of the most interesting things he had to say from an asset allocation perspective was the inclusion of private investments. What I found particularly interesting was the behavioral advantage those have by not being “marked to the market” in the same manner a public company would be, which makes so much sense for not only the higher net worth individual but also the average investor.

 

 

We know public equities are marked to the market, that is so prevalent today that they are often referred to as “the market”. But what investment options do you see that don’t function that way?

 

A few examples:

 

Real Estate

 

Private Equities

 

Life Insurance settlements

 

Private lending 

 

Syndicated real estate 

 

 

If you can’t get comfortable enough with public equities as an asset class having the volatility that’s so transparent these may be better alternatives to consider. That is, assuming long term wealth building is your goal.

 

 

2 Comments

  1. Drew on February 4, 2019 at 7:45 pm

    Great perspective 👊🏼

    • Beau Wilson on February 6, 2019 at 8:31 am

      Much appreciated Drew!

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