Is It Time To Buy Your Yacht, Second Home, Etc.?

Remember “Buy Low, Sell High?”

Well, it may be in for an unusual twist. Selling shares of common stock and buying consumer goods we want may be one of the smartest things we could do. Stocks are high. Everything else is cheap.

We spend most of our time worrying about how to make ends meet. But what if that isn’t a problem anymore? What about the people who are starting to notice that their stocks have become so pricey, their income so adequate, that everything seems cheap?

I am not kidding. These people exist. And they exist in larger and larger numbers as this market continues to rise. We are talking now about people whose pensions are well funded. Who maxed on their qualified plan contributions years ago. Who paid off their mortgages. Who wrote the last tuition check. And who bought their last car with a check. We are talking about people whose checking account balance seems to rise no matter how casual they get about spending.

Don’t get me wrong. They may not be “rich” in the ‘Life Styles of The Rich and Famous’ sense. They probably don’t have limousines, private jets, multiple houses, or stables of race horses maintained for their amusement. But they do have more than enough income to meet their needs and more than enough in investments.

What do they do next?

If this question seems a bit strange, consider the plummeting value of houses, yachts, and other goodies:

• Sometimes the value is plummeting in dollars. This is something we understand. There is the story of a man who invested, in 1987, his reported life savings of $1,250,000 in a 1971 Ferrari Daytona Spider. He believed its value could only increase because the car would never be made again. Now it is worth $155,000. That’s a loss we can understand.
• There are other things that are plummeting against the value of stocks. Their prices are flat to rising in dollars and that is something we don’t understand very well. Only a year ago, for instance, we reported on the “exchange rate” between houses and common stocks, noting that it had fallen, in 1995, to the lowest level ever recorded. ( “Make Way For The Taj Mahal Era of Housing”, May 26, 1996)

While the price of the median house had nearly doubled from $62,200 in 1980 to $112,900 in 1995, its value in common stock had fallen by more than 60 percent.

Well, guess what? Houses are still cheaper today.

The National Association of Realtors recently reported that the national median sale price for an existing house was $123,700. The Wilshire 5000 index, meanwhile, had risen to 8,946.5. Divide the median home price by the Wilshire index and you get a new ratio of 13.8, a decline of 73 percent since 1980.

In Shares of Common Stock, Home Prices Are Dirt Cheap And Still Falling

Sources: National Association of Realtors; Statistical Abstract of the U.S

If it’s smart to “buy low” and “sell high”, doesn’t this mean that it might be prudent to buy a second home? How about a TV set? A stereo? A computer? A Car? An airplane ticket? A luxury watch? An expensive meal? A sail boat? All are dirt cheap if you pay in shares.

While our prudent friends in the investment community exhort us to save and invest more to avoid future indigence, it’s just possible that the smart, prudent thing to do is peal off a few of those highly appreciated shares and exchange them for…something that’s fun.

If stocks are overvalued, as many worry, a sale today could be a wise investment because that $30,000 sail boat could look like a real deal if the stock you bought it with plummets to $20,000. Similarly, if stocks continue to rise, you’ll miss some of the appreciation but you’ll be more diversified.

And you’ll have a whole lot more fun.

This information is distributed for education purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, product, or service.

Photo by Wendy Wei

(c)  A.M. Universal, 1997