I started my banking career in August of 2008, which turned out to be a memorable month to begin one. Thirty or sixty days in, the layoffs came, and they were not small. I kept my job, and I have always assumed it was because I was cheap enough not to be worth firing.
That was the world I was looking at when a real estate agent walked me through a two bedroom, one bathroom house in a solid St. Louis neighborhood. It was listed around thirty-nine thousand dollars.
I did not buy it.
At the time that felt responsible. The bank had rental properties on its books that were literally unsaleable. Not overpriced. Unsaleable. Residential lots nobody would take at any number. I was young, I had just watched a building full of people lose their jobs, and putting money into real estate felt like walking toward the fire.
I was in my twenties, single, and had not yet met my wife. No mortgage, no children, nobody depending on me. If there was ever a moment in my life when I could afford to take a swing at something, that was it.
Looking back, there was almost no risk in that house at that price. I could have rented it and covered my expenses without difficulty. It is worth three or four times that today.
I have thought about that house for a long time, and the lesson I took from it is not the one you would expect.
Everybody Knows the Rule
You have heard the advice. Be greedy when others are fearful. Buy when there is blood in the streets. It is probably the most repeated idea in investing, and it is repeated because it is true.
The trouble is that it gets told as a story about courage. Somebody grits their teeth, buys at the bottom, and is rewarded. The scary part lasts a few paragraphs and then the money shows up.
That is not how it went for the people I watched actually do it.
I knew people who bought distressed property in those years, some of them quite a lot of it. The outcomes were not uniform. Some ground through the next few years, sold into a market that had not really recovered, and I suspect ended up with less than they put in. Others held on, waited it out, and did well.
Here is the part nobody mentions. For the ones who did well, it looked like a mistake for a very long time.
This is not just my impression. The S&P 500 peaked in October of 2007 and did not close that high again until the end of March 2013. Five and a half years. If you were reinvesting your dividends along the way you got back to even about a year sooner, which still means four years of holding on before the market told you that you had not been wrong. Housing took far longer. National home prices peaked in July of 2006, fell about twenty-seven percent, and did not reach that level again until September of 2016. Ten years and two months.
And those are the numbers for the index, which describes an average house owned by nobody in particular. The real person holding a real building through those years also had tenants who did not pay, a roof, and a lender to keep comfortable. That is a job, not a windfall.
The courage to buy at the bottom is not the expensive part. The expensive part is the decade afterward when you cannot yet tell whether you were smart or stupid, and neither can anybody else.
Two Different Games
To see why the reward takes so long, it helps to notice that there are two very different ways people approach anything with a price on it.
The first is the way Warren Buffett does it. You work out what the thing is actually worth from what it produces, and you buy when the price sits below that. It is arithmetic applied to a business.
The second is playing the crowd. You are not asking what it is worth. You are asking whether other people will pay more for it next month than they will today.
Both of these make money, and they are not the same skill at all.
Think about a poker table. You can be dealt a flush, do the math correctly, and know with real confidence that you have the best hand. And you can still get pushed off that pot by somebody who never looked at your cards and instead read the four people sitting around him. Being right about your hand and winning the hand are two different achievements.
Markets work the same way. Value tells you what something is worth eventually. The crowd tells you what it costs on Tuesday. In the short run the crowd wins every argument, and in a panic the crowd is not really making an argument at all. It is running.
So when you buy something genuinely cheap during a crisis, you have not entered a trade that pays off when you are proven right. You have entered a waiting game that pays whenever everyone else gets around to agreeing with you. Sometimes that is a year. In 2008 it was closer to a decade.
What This Actually Asks of You
Here is the uncomfortable part. For most of us, being greedy when others are fearful does not mean what it sounds like.
It sounds like you should be buying. Realistically, you will not be. At the bottom of a bad market you probably do not have a pile of cash sitting ready, and if you do, you almost certainly will not have the stomach to spend it while your job feels uncertain and every headline says the world is ending. I did not. I was looking straight at a house I could have covered with rent.
For a normal person with a normal paycheck, the trade is much smaller and much less heroic than the phrase implies.
It mostly means not selling.
It means your contribution goes in on the fifteenth exactly as it did last year, while the balance is down thirty percent and you feel sick looking at it. It means you do not move to cash to feel better. It means you leave the retirement account alone rather than protecting yourself at the exact moment protection costs the most.
That is not brave. Nobody will ever ask you about it at a party. It is the kind of thing that makes good investing so boring. But it is the version you can actually execute, and over a lifetime it is worth more than the dramatic version you will never get around to.
The people who bought those distressed houses were not smarter than everybody else. Mostly they were willing to look foolish for longer than everybody else could stand.
I was not willing. That house was thirty-nine thousand dollars, the arithmetic worked, and I walked away, because I could not see past what was in front of me to what it would be on the other side.
The good news is that the trade available to you does not ask for that kind of nerve. It only asks that you leave things alone at the moment when leaving things alone feels insane.