Did you play musical chairs as a kid?
I played in Sunday School, and I don’t think I ever won. It was painful, but I’m okay with it now.
For the uninformed, the game started with a circle of outward-facing chairs. Kids march around outside the ring to queue up the music while the teacher grins slyly, her hidden hand poised on the record player’s arm (c. 1970) to stop the music at any time. When the music stops, all the kids sit down in the closest chair.
But there was one problem. There’s always one less chair than kid, which meant someone had to get ejected from the game. With one less player, the next round also started with one less chair. It would repeat until there was a final winner—typically the aggressive, pushy bully I never liked.
The lesson of musical chairs is that there are multiple paths to losing. We typically talk about the multiple paths to victory, but it’s about losing in this case.
You may see where I’m going with this and ask, “Why is Paul being so negative? He seemed like a nice guy on the videos.”
Why so serious?
This post is another warning about the craziness in today’s real estate market. We are seeing an unprecedented runup in asset prices and the associated risk that comes with it. There are many ways to lose in this market and fewer ways to win than I have seen since pre-2008.
I will let you know why I think the risk is so high. Then I’ll tell you a few stories supporting my point. Then I’ll wrap up with a thought about how to win in this market or any market. And no, it’s not by sitting on the sidelines.
Why is the real estate world so risky right now?
It’s quite simple. When paying an extraordinarily high price for an asset and adding the associated transaction fees and friction costs, you count on a future where revenues must be increased far above current levels to generate solid investor returns. But paying top dollar means buying an asset with the tiniest margin of safety,…