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What Buying A Home Can Teach Us About Buying Stocks

Allen R. Jean
January 5th, 2017

As a whole, the process of buying a home is a no-thrill, and at times gruelling experience. Yet this experience teaches us a lot about the proper approach to stock-market investing. While the prize is your coveted dream home (or for some, freedom from a renters cash drain) the actual goal is securing a 15 or 30-year mortgage.

Now, as boring as a traditional 15 or 30-year mortgage may be they have provided ample safety and assurances to both the buyer and lender. Through income documentation, and debt assessment most Americans have fared well during this experience. This normal home buying experience differs dramatically from the housing boom era of the early 2000's no-doc and NINJA type loans to name a few, and the feverent flipping mania fueled by HGTV, your brother-in-law and easy credit.

There are three key ingredients that separate the thought process of a home buyer from that of the average stock buyer. Understanding these three elements can pave the way toward better stock market investing.

  • Real property. Something tangible and visible to the eye. Being able to see and touch your home makes it yours and despite the fact that your home is owned by the bank, for all intents and purposes you consider yourself the owner. Whereas in a stock-market purchase far from considering yourself an owner you are relegated to a bystander succumbing to the ups and downs of the stock market. Yet, when it comes to stock market purchases, you are an owner. Albeit a small one, you must act like one.
  • Illiquidty. A long-term view. The housing market is illiquid meaning you are not in a position to buy today and sell tomorrow. Entering a 30-year mortgage requiring a sizable down-payment is enough to ensure that you have done your research; from analyzing multiple properties to effecting title searches and performing inspection. Illiquidty drives the right behavior. The liquidity of the stock-market on the other hand is alluring, much like the sirens in the Odyssey. With little preparation and the ability to get out immediately, money is bet on unfamiliar companies (even if known by name) and at the behest of a friend or relative. Don't let the liquidty of the market confuse and cloud your judgement. Make no mistake about it this is an investment and must be treated as such.
  • Single-largest purchase. The home is the largest purchase most people make in their entire lifetime and one they will not take likely. The amount of preparation and time spent when purchasing a $25,000 vehicle pales in comparison to the work done on your $250,000 property. While a stock-market investment may begin small, over time through contributions and appreciation it will grow to a size comparable or even greater than the value of your home (hopefully!). Treating it at the onset as serious tool to create wealth will ensure that you have made the right decisions. Just as you would hire a realtor depending on your skill level, hiring the right advisor may be a critical component of the whole process.

A deeper dive will further assist us in answering the question of what we can learn about stock-market investing from the innocuous home-buying experience.

Befor one can begin to search for a house a full financial picture is required to determine how much home is affordable based on both a down-payment and interest rates. Once that has been established, one is then able to hire a realtor who will expertly guide you through a process they have gone through numerous times. With the goal of helping you select your dream home within the confines of your budget. After searching and visting homes eventually a potential target among several dozens is chosen. Acceptance of an offer upon a satisfactory inspection report by the seller and you are on your way towards home ownership.

What does this have to do with stocks?
Consider the following: when deciding whether to get into the stock market, we would be just as wise to some pre-planning prior to our actual investment. Ask yourself these simple questions. How much are you able to commit yearly withou causing undue financial stress? What is my time-frame (less than three years and your risk increases drastically)? What type of companies am I going to invest in? Do I understand the who, what, where, when, how and why of this business? With some pre-planning you'll set a firmer if not solid foundation to build your investments of off. If you yourself cannot answer these questions, find someone

That brings us to our next step; analyzing the companies. When buying a stock your want to choose businesses that meet a certain criteria. For example: do they have good and able management, is the company selling a price that makes good business-sense, and does it have the potential for rapid growth. A key determinant to that last question is what substantiates that future growth. In the same way you would most likely no blindy bid on a home, you should avoid blindy buying into businesses. You should attempt to gain a greater and clear understanding of the company by visiting key stakeholders. If you yourself cannot answer these questions, find someone who you trust that can.

Buying a stock should be done similarly to buying a home. It should be a long-term investment. Markets are unpredictable, yet the risk is reduced significantly when you've done your homework and are confident in the decision you have made regardless of what the stock market might quote you.