I’ve just made a horrible investment

Author: Charles Sizemore
Covestor models: Sizemore Investment Letter and Tactical ETF

I have made a horrendous investment that has cost me far more in time and money than I had planned. Yes, I bought a house.

The idea of your home as an investment is one of those myths that refuses to die, even after the worst real estate crisis in living memory. It seems that there are certain lies we are determined to believe, no matter how much evidence we see to the contrary. Something that pays you an income is an investment. Something that costs you money is an expense. You tell me: which best describes your home?

A house can be an investment, of course. But only if it generates income for you. The house that you call home would certainly not fit this description unless one of two scenarios hold true:

1. You rent out part of your home to tenants, or

2. Your property happens to have exploitable minerals on it.

For the rest of us, a house is a bottomless money pit. Even when nothing needs fixing, mowing, cleaning, or maintaining, you or your spouse will feel compelled to throw away perfectly good money on improvements, furniture, appliances…and the list goes on.

So why, you are no doubt asking, did a man who gives investment advice for a living come to make such a phenomenally bad investment? I have a two year old son, who needs a yard and because my wife wanted something to decorate. It is really that simple. It was a lifestyle choice, and economics were not a consideration.

I bring all of this up for a reason. While I will maintain to my dying day that a personal residence is a poor investment, this doesn’t particularly matter to a family with small children. Things like school districts and soccer leagues matter far more. Demographically, the United States has an enormous pipeline of young families and babies waiting to be born. The children of the Baby Boomers—the Echo Boomers—are just now reaching their peak family formation years. All else equal, this means enormous demand for starter homes in the coming years.

Of course, all else is not equal. Credit conditions are tight, and there is still an enormous supply of foreclosure and pre-foreclosure properties in some markets that is years away from being absorbed. Prices won’t be recovering their 2005 peaks any time soon, or perhaps ever in some of the hardest-hit markets. Still, opportunities are ripe for the picking for investors willing to look. This is a theme I intend to expand upon in the coming months, but I wanted to give you a sneak preview today.

Moving on, we have new developments in the Turkcell (TKC) saga. Readers will recall that Turkcell is a long-time holding of the Sizemore Investment Letter and that the company was my pick in the InvestorPlace.com 10 stocks for 2012 contest. Of the ten professional investors in the contest, I’m currently in 5th place with a year-to-date gain of 19 percent.

My colleague Jeff Reeves of InvestorPlace edged ahead of me recently with his choice of Alcoa (AA) up 20 percent, and financial writer and serial entrepreneur James Altucher is up 21 percent with his choice of Microsoft (MSFT), a long-time recommendation on the Sizemore Investment Letter’s Drip and Forget portfolio.

As we are still barely two months into the year, this should prove to be an exciting contest. My investment thesis for Turkcell was straightforward. When investor risk appetites evaporated in 2011, emerging market stocks in general and Turkish stocks in particular got hit hard. In addition to being a volatile emerging market in its own right, Turkey had the misfortune of being sandwiched between debt-ravaged Europe to its north and the Arab Spring to its south. It should come as little surprise that Turkey fared poorly last year, but as investor risk appetites return I expect to see Turkey do extraordinarily well in 2012.

In Turkcell, we had an additional wrinkle. Due to a power struggle for control of the company between Turkey’s richest man and a group of Russian and Norwegian investors to whom he allegedly owes $1.4 billion, the Board of Directors has been paralyzed and the company missed its last dividend payment.

To clarify, the company did not officially cut or eliminate its dividend. But due to the Board’s infighting, it never got declared or paid. Markets hate uncertainty, and Turkcell’s ownership situation is anything if not uncertain. When the legal drama is finally settled and the dividend payment is resumed, investors who have been avoiding the stock will have the green light they need to pile in.

Turkcell is one of the finest emerging market telecom firms in the world, and the Board issue has been a monumental distraction. When that haze is finally lifted, I would expect Turkcell to jump 10-15 percent within the day and as much as 50 percent over the course of the year.

That day may finally be getting close. A British Virgin Islands court ruled in December that Cukurova, the holding company owned by Mehmet Karamehmet, Turkey’s richest man, had to deposit $1.4 billion in an escrow account by March to comply with the prior court order. Failure to comply will effectively give control of the company to the rival investor group.

We can only wait and see what Karamehmet does, and either way he still has an appeal pending with Britain’s Privy Council. But regardless, this story will be drawing to a close soon, and when it does I expect to see Turkcell’s new Board quickly resume the dividend. Stay tuned.

Our “Glamour and Glitz” investments continue to perform exceptionally well. Daimler AG (DDAIF) is up by fully 34 percent in just a month and a half. The company’s fourth quarter profits beat expectations, and—most importantly—Daimler announced that it would be raising its dividend by 19 percent.

The company has its challenges; the European market remains tepid, and its truck and bus businesses are feeling the effects of slower growth worldwide. But overall, I continue to like Daimler as a “buy.” Diageo (DEO), our hybrid luxury and sin stock investment, has also had a good run. Sales of its whiskies and other premium drinks were up 18 percent in emerging markets in the first half of the company’s fiscal year, led by strong growth in Latin America. And again, most importantly, the company raised its dividend by 7 percent.

Much of our success in 2011 was due to our insistence on loading the Sizemore Investment Letter portfolio with strong dividend payers. Dividends were the only return that many investors saw last year, and they continue to play a major role in the recommendations of this newsletter.

Our investment in high-end auction house Sotheby’s (BID) continues to be volatile, but the fundamentals remain strong and the news good. Rival auction house Christie’s recently made the news with the sale of a Francis Bacon painting that pushed its contemporary art sales to levels not seen since before the 2008 meltdown.

As I’ve already written a thousand times before, I love the high-end art and collectibles markets as a backdoor way to get access to the rise of the nouveau riche in both the developed world and, most importantly, in emerging markets. As the Financial Times writes, “Art experts say growth at the top end of the market has been driven by a new wave of Asian billionaires, especially from China.”

Though we’ve had a few close calls already—including a near default by Greece—the news in 2012 has been mostly good, even while investor sentiment continues to be mostly bad. Even after multiple months of solid gains, most investors are scared to death of putting their money in the stock market. As contrarian value investors, this is fantastic news for us. It tells us that, a few volatile bumps on the road notwithstanding, this bull market still has a ways to run.

  • Cfbader

    Only idiots and realtors think a house is an investment. If you breathe, you have to live somewhere. You choices are to buy or rent (or move to a crack den or commune). Your going to spend more time at home than anywhere else, so look for some place where you are happy and comfortable

  • Dave

    so if you bought a home in 2002 and sold in 2006…and made 37% return…(and lived in the home)  was that not a good investment?   just curious….BTW   Warren Buffett said he would buy up lots of homes right now….but he doesnt have the management arm in place to maintain them…. 

    • Brandon de Graaf

       ”if you bought a home in 2002 and sold in 2006…and made 37% return…”

      Yes, that is a nice return. But if you then bought another house in 2006 and held until now like most people would, you have to live somewhere after all, then you would have lost that return, if not made a loss.

      If average house prices rise at a faster rate than average net income, then houses would simply become unfordable after a few decades.

      For example, if median annual household income is $50,000 and median house prices are $222,000, then a common house would require the equivalent of $222,000/$50,000=4.4 years gross household income to purchase today. But if median annual household income increases by 3% p.a. while median house prices increase by a modest 6% p.a., then in 20 years time a common house would require the equivalent of $711,984/$90,306=7.9 years gross household income to purchase. This ignores tax, cost of living, etc. If you think that is still affordable then try again in 40 years time. My point is that house prices cannot rise relative to incomes for very long.

      BTW, Warren Buffet probably wouldn’t live in all the homes of course, he would rent them, thereby generating income (an asset/investment), and maybe sell them for a better price later.

      • Mr Kurtz

        Brandon, 

        You buy a house at $222,00 to live in. It’s paid off in 30 years. Your payments will be relatively flat for that time-frame, and lower thereafter, plus you will have an asset to show for it. 

        The asset value should continue to rise at pace with inflation as you age and your income stops or becomes fixed. Basically you’re locking in your housing payment for 30 years at a fixed, presumably manageable rate, rather than subjecting yourself to the volatility of the rental market and paying off someone else’s investment. 

        You are betting that real estate will go up, rather than down over time, which is a relatively safe bet if we are talking a 30 year time-frame, and especially now that prices are at the lowest point in a long time in most markets.

        If you buy into a real estate bubble as it is expanding and near bursting, that is another story, as we all know. However, there may also very likely be another real estate craze at some point in the next 30 years as history tends to repeat itself – people are greedy and have short memories. Plus all the money issued by the government should eventually lead to high inflation at some point in the coming years…

        I think this is a more likely scenario than values dropping another 50% from these already low levels.

  • Bob

    I find it odd that your child’s future and your wife’s happiness aren’t considered positive returns. 
    I think at some point an unhappy spouse is a 50% loss of all your assets in any community property state if you don’t have a pre-nup.  There is probably similar math for skimping on the environment and upbringing of a child.

  • guest

    Since when is an investment only an investment if it creates income?

    • he

       since ever

      if do not create income we call it charity or loss

    • Dave

      I guess he doesn’t consider Apple stock an investment…

  • guest

    I agree with Cfbader.  It irritates me when people zealously tell me these things are “investments”:
    House
    Car

    Car…  Unless you taxi people around or make shipments for people, it’s not an investment and I’d go so far as to not even call it an equity!  That’s like calling your computer an equity!  In fact, I think cars depreciate faster since we’re no longer in the Pentium 4 era.  Go figure!

    House…  At best it’s a place to build equity.
    Anyone who says they made money with real estate is either very patient, experienced and intelligent or should take “introduction to accounting” again.
    Things that will wreck the revenue of a house:
    Property taxes, federal taxes on profit of sale, mortgage interest, down payment (time value of money), insurance, maintenance, and inspectors (to make sure you’re not living on a Radon gas pocket) and the stress, money and time spent on the fine print.
    Additionally, there’s the possible need for a lawyer and tax firm to help you not pull your hair out.

    So yeah, flipping houses…  Good luck with that.

  • Mac

    If, when you sell your house after 10-20 years, you have more money than if you had rented, that is a successful investment.

  • Dave

    u probably rent….right?

  • Cifey2

    Probably better than a car.

  • Sboyle

    An investment doesn’t necessarily have to pay you a dividend or short-term income, many stocks don’t pay dividends and you can’t live in stocks!!  Houses can save you money over renting (which is the same as earning income) AND can also create a long-term capital gain for you — they are a wonderful investment particularly in the United States where interest on your mortgage is tax deductible!  For example, it may cost you $1,500/mo to rent a $200,000 3 bedroom house which is not tax deductible.  If you buy that same house with a 30 year fixed mortgage your monthly payment would only be ~$700 depending on how much you put down, your interest rate, etc. and that is BEFORE the tax deduction.  In this case a house saves you money every month which is like having a second income over the person renting the identical house so it is a great investment!!!  As Buffett says, there has never been a better time to buy a house “using a 30 year mortgage”.  Real estate is pretty easy — there is a time to buy and there is a time to sell.  Unfortunately many people don’t know the difference and, unfortunately, realtors and mortgage brokers are paid by commission so they are not going to advise a client that they are overpaying for a house.  This article is poorly written and misinformed (I actually stopped reading it), HOUSING IS A GREAT INVESTMENT.  The problem is that people bit off more than they could chew using exotic mortgages such as ARMs, teasers, negative amortization loans, etc. to buy a house that they couldn’t afford and they were unable to ride out the inevitable correction in housing prices.  Bottom line, if you can’t afford the payment with a 30 year mortgage than you shouldn’t be buying the house!!  A 30 year mortgage ensures a fixed payment that you can handle barring job loss.  The next step is to create a 6-12 month reserve fund.  A refi should only be done to lower the interest rate and as a general rule should never pull cash out of the house.  HAPPY “INVESTING”!!!

    Stephen Boyle, CA
    Chief Financial Officer
    Wedgewood Enterprise Corporation

  • Chuck Vail

    I completely agree with Dave in the third comment listed below.  There are many people who rode the wave of housing price appreciation and who for whatever reason (retirement, career relocation, market savvy, dumb luck) sold at the height of the bubble and realized gains of almost infinitely greater multiples than the non-existent broad market equity returns of the past dozen years.  Try selling those folks on the proposition that a home is not and cannot be a good investment.  Which brings up the matter that there are far too many clownish commentators on the internet, trying to peddle ill-considered and downright stupid opinion.  Mr. Sizemore would seem to be part of this group.  Holy-moly, can he possibly be so silly, so shallow, so stupid as to fail to realize that markets wax and wane, that bubbles inflate and deflate, that thus it has ever been.  If and when this economy really gets back on its feet, and god willing if it starts to take off like a rocket (hey, it could happen), then the condo in Phoenix or Miami now going for a song could once again be worth a small fortune.  I hate generalizations, especially generalizations rooted in personal experience and bias, instead of facts.     

  • Mike

    I don’t think of my primary residence as an investment, nor should it be though of as one.  However in the long run it usually is. I think your thoughts are a little one sided and not fully thought through.  Even if you own a house for 10 years and sell it at a loss you are still ahead.  Assume you purchase a house for $300,000 and sell it 10 years later for $290,000.  You may think of it as a $10,000 loss but you are not looking at the full picture.  You need to live some where, so if you didn’t own the house you would have to rent.  Assuming your rent was $2,000 a month that equates to $240,000 over 10 years.  I would much rather be out $10,000 owning a house vs $240,000 on rent.  Of course home ownership does have other expenses like taxes and repairs but you are still far ahead in owning vs renting.  Plus you cant look at the last 4 years as typical.  The vast majority of the time over the past 100 years, anyone who purchased a house and sold it 10 or more years later has sold it for more than the purchase price.

  • greg1172

    I finally found a perspective we are in agreement on. I have lost more money on homes in the last 20 years than anything else. I just moved and am trying to sell the other home now. i bought in the down market but renovated so i stand to lose $100k. its unavoidable as home buyers are still in the foreclosure mindset. I learned my lesson and now i live in the best neighborhood in Atl. so, one caveat to your point is that a home IS an investment in the right location!