Ignorance And Greed Have Caused Today’s Financial Woes
Posted on October 3, 2008
As we watch the financial industry implode, the problems can be traced to the dangerous combination of ignorance and greed. Like lemmings rushing into the sea, financially illiterate individuals flocked to speculate in real estate without a clue that the bubble was about to burst. They were encouraged by predatory lending practices rooted firmly in greed. That’s what happens when millions of adults enter the workforce with little or no knowledge about basic money management skills.For the past several weeks, I’ve been writing about how schools are failing to teach personal financial literacy and how this makes people easy prey for savvy predatory lending practices. Most of the economic problems we are currently experiencing can be traced directly or indirectly to the meltdown in the real estate market. Anyone with minimal knowledge of economic principles should have seen the problem coming and been able to avoid it.
Prices were increasing annually by double digits and financing was available for anyone who could fog a mirror. During this crazy time, I chose to sit on the sideline and watch. It was like watching surfers ride the crest of a tsunami, but as all waves do, it eventually hit the beach. Many people and companies were devastated as it played out and the market began its retreat to normalcy. Greed prompted people to buy properties for amounts that were impossible to justify and lenders to make loans that could only be paid back if the properties were sold at even higher prices. Why were all these warning signs ignored? I believe the answer is as simple as ignorance and greed.
Ignorance and greed are what lead to the Bigger Fool Theory, which says, “If you can buy for little or nothing down, it doesn’t matter what you pay. There will always be a bigger fool coming along who will bail you out.” That works fine unless you are the biggest fool; the one who owns the property when the bubble bursts. Real estate can be highly leveraged, which makes it very enticing to speculators with a get-rich-quick mentality. Each time a property is purchased and quickly flipped for a healthy profit the urge to do it again becomes stronger and stronger. Each transaction becomes a gamble that can easily develop into an addiction. The ignorance of this fact coupled with the get-rich-quick mentality that comes with greed makes this a recipe for disaster.
We are experiencing the results of decades in which teaching financial literacy was not a priority item. Most people today don’t understand that building wealth and developing the skills to manage it takes time. With little or no financial education, people often get themselves in trouble trying to get-rich-quick. I often tell people that it only took me about 30 years to become an overnight success.
When it comes to investing in real estate I found a way to keep myself grounded and avoid the mistakes so many speculators are now experiencing. Throughout the big price run up that led to the current debacle, I followed the philosophy that if a property had to be sold to make a profit, it was speculating, not investing. I’m an investor and as a result, I’m experiencing the best year ever while the speculators are suffering. I didn’t buy when the market was red hot, because it didn’t make sense. Now, as prices fall and the market is correcting itself, things are beginning to make economic sense, so I’m buying once again.
There are no substitutes for patience and persistence when it comes to investing in real estate. Sure, you can make money buying and selling, but you can also lose your shirt. There is a big difference between making money and building wealth. A high income does not necessarily equate to wealth. Many people earn large incomes, but never develop wealth. They live in big homes, drive expensive cars, wear designer clothes, belong to country clubs and display other trappings of wealth, but that doesn’t mean they are wealthy. Wealth is not measured by the standard of living one enjoys, it’s measured by how long they can maintain that standard of living if they suddenly lose their ability to work and earn.
So many of the speculators who were in the market a few years ago are now learning this lesson the hard way. They were making tons of money buying and selling real estate. They were living it up and enjoying the appearance of wealth. When times were booming, anyone could make money, even a dead fish can swim downstream. Today many of these same people are suffering because market conditions have taken away their ability to keep buying and selling for a profit. Some are now selling their properties at a loss, turning in their expensive cars and trying to survive by downsizing in other ways. That’s what happens when people focus on making money and neglect investing in a way that can secure their futures.
Here’s a tip! More wealth has been created with real estate than with any other type investment. This is important, because with wealth you control circumstances. Without wealth the circumstances control you. When you purchase real estate in a way that generates enough cash flow so you don’t have to sell to make a profit, your purchases will enable you to build wealth. Finding deals like this requires patience and persistence and the knowledge to understand the philosophy of getting rich slowly, safely and securely. There are no shortcuts to wealth.
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