Inflation, Debt and the Investment Landscape – David Stein | PREI 052
Our guest today is David Stein. David was the Chief Investment Strategist and Chief Portfolio Strategist at Fund Evaluation Group, LLC, a $33 billion investment advisory firm. Today he likes to teach people about money, how it works, how to invest it and how to live without worrying about it.
- What is inflation, and what causes it?
- Why you shouldn’t pay off your mortgage.
- What does the current investment landscape look like?
- Plus other topics we discussed on tangents.
If you missed last week’s episode, be sure to listen to How to be Mortgage Free in Five to Seven Years.
Enjoy the show!
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Inflation, Debt and the Investment Landscape – David Stein
Welcome to Passive Real Estate Investing. I am your host, Marco Santarelli. If this is your first time here, welcome. If this is not your first time here, I am glad you made it back. Today, I wanted to do a show that was a little different than what we typically do, which is hyper focused on real estate specifically. So much of what ties into real estate and investing in general has to do with what is going on in the economy and around the world, whether it be oil prices or interest rates or countries devaluing their currency versus our currency. Changing the cost of goods that goes into transportation and changing the cost of the materials that go into housing, etc.
It is really a very wide complex interconnected web. What I am going to start doing in future episodes, I am going to sprinkle in a show here and there about the economy and about economics, and about some topic related to real estate but not directly. Hopefully, that’s going to help enlighten you and broaden your knowledge about what is going on around the country and the world. I don’t get into politics, of course, but maybe something that is happening in Washington is going to affect financing or what you can and can’t do with your properties. Who knows?
Today, I am bringing a guest on by the name of J. David Stein, a really smart guy. He used to manage billions of dollars in a fund, not a hedge fund but an investment fund and he is a strategist. He has an interesting way to look at things and he explains things in a fairly clear way. In fact, he’s got a great podcast that I listen to and I enjoy. It’s just one of many sources of information that I get. Anyway, I was a little pressed on time on my interview with him, so I had to rush it a little bit and I apologize about that in advance.
It’s my pleasure to welcome, David Stein to the show. David was the Chief Investment Strategist and Chief Portfolio Strategist at Fund Evaluation Group LLC, a $33-billion investment advisory firm. Today, David likes to teach people about money, how it works, how to invest it and how to live without worrying about it. He is also the host of the personal finance podcast, Money for The Rest of Us, which by the way is a great podcast. David, welcome to the show.
Thanks, Marco for having me. It’s good to be here.
It’s great having you on the show. I actually am a listener of your podcast. I enjoy it very much because it’s an interesting, easy listening format to learn about money and the economy and everything else surrounding that, which is not exactly what our show is about. I wanted to bring you on because I think a lot of our listeners are either sophisticated and or interested in different aspects and asset classes and how maybe all this stuff in the economy ties back to real estate and the landscape that may or may not affect us. This is going to be a different type of show.
What I’d like to do is start off with you, maybe you could tell us about yourself and your background so people have a better frame of reference.
Sure. As you mentioned in the bio, most of my career I spent as an institutional investment adviser. We were a firm that started working mostly with not for profit organizations, a lot of endowments and foundations. As part of that, the core’s asset allocation, help that they may identify managers. As part of that we focused on real estate. We spend a lot of time researching commercial real estate managers, REITs and as well as other asset classes. I was with that firm for about fifteen years both as a consulting capacity, we would consult with clients. For about a decade, I also managed a portfolio, about a $2 billion portfolio where I worked with. Essentially, we were given discretion by endowment so that’s like, “Here’s our target and here’s ranges. Go find the best asset classes and managers within that policy.” That got me much more involved in economics, in adjusting asset allocations based on market conditions as opposed to strictly buy-and-hold investing.
Then, I got into my mid 40’s and we were all of the same age at this partnership, I just didn’t want to wait out the clock. I was ready to try something different. I left that firm about four years ago. My partners bought me out. About two years later, I launched the podcast and I do online education, in turns. I have a membership site where I provide asset allocation guidance to people and education on the economy. What I don’t do is I no longer manage money, so I am no longer a registered investment adviser. Everything I do is really on a general education basis.
You are still primarily involved on paper assets?
It is. Personally, I invest in a couple of private capital fund. I’ve done private investing in what we own, our farm. I’ve done some rental income properties in the past. My net worth is about half private, so non-public half, more paper assets. I split and I am comfortable with both sides of that. What I find is many listeners are starting to the point to or are searching for how do you do the private side and that’s where a show like yours can be very valuable because it is just a different ball game for people. Whereas I, I probably, in terms of my education with individuals, spend more on the publicly traded side, the paper asset side, mainly, because there’s just not as quality information out there as I would like to in terms of investing. A big portion of, in terms of how I invest, is I’m primarily passive so indexing ETFs, primarily buy-and-hold but not entirely so. I don’t have the temperament to sit and ride down a market that falls 40%. I am always looking for what I call regime changes, global economic recessions, and then adjust portfolios based on that. The way I describe investing is investing on the leading edge of the present. We are not trying to forecast or predict. We are trying to react as things happen. When there are signs that suggest that the choppy waters are ahead, then I’ll make adjustments and I will certainly teach my members or show them and let them know, and I’ll obviously let them know on the podcast also to potentially pull on the sales a little bit.
That’s a good segue to one of the first things I want to ask you about. I want to get your impression as it relates to the landscape of the major asset classes out there, starting with equities, which most people just know that as the stock market.
One of the things that I did and I did this as an institutional adviser is, you can’t invest in any asset class unless you have an understanding of what it can earn, not based on history but looking out ten years. I have always invested in a way that, what’s a reasonable assumption? I want to understand what is driving returns. When I look at stocks, what drives return over time is the dividend yield. It’s the corporate earnings growth. The third element is how has valuations changed. How are investors valuing those earnings? During a period when the richly valued is very expensive, you can get very strong returns. Much of other strong returns that investors experience in the ‘80s and ‘90s wasn’t so much because the corporate earnings were growing faster, was because valuations got more expensive. When I look at where we are today with stocks, now US stocks are overvalued than they have been historically. The PEs are high, the dividend yields are on the lower side about 2%. When I look at US stocks, a reasonable estimate over the next ten years for a nominal annualized return is about 5.5% to 6%.
Now, the wild card there is, will investors, at some point, not be willing to pay as much as they are paying today? When you look at, let’s say, the median price-earnings ratio on the S&P 500 is in the low 20s. Ten years from now, they’re only willing to pay eighteen, then you are going to see stocks not do as well as 5.5% to 6%.
You can do better with stocks in emerging markets, for example, where you have higher dividend yields, faster corporate earnings growth and less of a risk that they are going to get revalued downward. They expected return is more 8% to 9% as well as some other non-US areas. Generally speaking, when I typically always have, and I think most people should have, some investments in stocks. Now the question is what level? I have never been a person that says 100% stocks. Particularly for adults that are in their 40s or 50s or 60s, I think you should have different drivers of returns and stocks do well over the long term, but you have to have reasonable expectations.
Do you think the stock market is overpriced and inflated? Let me tell you why I am saying this. PE ratio is typically in a normal “market”. They are going to be in the teens, 14, 16 range. When you are above 20 as a PE ratio, to me, at least that tells me that it’s overpriced and inflated. The higher that goes, I think it topped out at 26, if I am not mistaken at the last crash. Is that not a flag that raises concern?
It is. That’s just the US stock market. The non-US, you are still in the teens. The US stock market, particularly large companies stocks, they are higher value.
Now, I just did a little segment for my members, because we were talking about that because the most recent episode I did, it was episode fifteen. We’re talking about different valuations for the US stock market. PE was one measure you can look at what percent do households are their net worth have in stocks? What is the total size of the stock market or capitalization relative to the economy? All those measures show the market is overvalued.
What shows it as undervalued are measures relative to interest rates. For example, there is something that is called the Fed model, where you compare their earnings yield on stocks. The earnings yield is it’s the inverse of the price earnings ratio. Essentially, it’s the earnings divided by the price. The earnings yield right now on S&P 500 is about 5%. This particular Fed model, actually, that’s choosing historical earnings. If you look at forward earnings, their earnings yield about 6.5%. What the Fed model says that US stock market is fairly valued when their earnings yield equals the yield on the ten-year treasury. A ten-year bond is yielding 1.5%. Then the earnings yield for stocks on a forward looking basis is 6.5%.
If you firmly believe in that measure, which I don’t, but it’s just another measure, then the market is 75% undervalued. In fact, it won’t be fairly valued until the earnings yield gets to whatever the ten-year treasury bond is. Where that causes me to pause is, again, if earnings yield is the inverse of the price earnings ratio, if the earnings yield got down to 1.5%, the PE of the S&P 500 would be over 65. Now, that is stratospheric.
The point of the whole exercise is, lower interest rates can justify how your valuations for stocks. Those that are focused on that particular measure would say, “Oh, a PE of 22, the stocks are still undervalued.” I don’t necessarily believe that, but it’s also a reason why I still haven’t exposed US stocks. It’s just not a huge waiting in my portfolio.
When interest rates are manipulated and we don’t have a true free market system and everything seems to be rigged or manipulated through, whether it’s quantitative easing or playing around with taxes, etc. Whatever it may be, your frame of reference changes. Stocks may look undervalued using your example here, but in actuality, they might be more overvalued than you would believe it to be because you are comparing it to treasury bills that are at historic lows. Does that make sense?
Exactly, which is why at the end of the day my belief is US stock market is overvalued. I think a reasonable rate of return over the next ten years on a nominal basis for US stocks is that 4% to 6%.
Then you have to compare that to, let’s say, REITs. REITs’ yields right now are close to historic lows and so your expectations for REITs are also low, because the dividend yield on REITs is 4%. I remember investing in REITs in the late ‘90s where yields were closer to 7% to 8% and the value of REITs for selling at about of 20% discount to the value of real estate. Your reference interest rates, historically low interest rates, are influencing every asset class, including real estate. Private real estate right now when you look at cap rates, for example, which I assume you talk about cap rates.
Cap rate is a pretty common metric that investors use, although it’s not my favorite. I’d rather talk about the cash-on-cash return because most investors are going to use other people’s money, in other words, leverage to acquire their assets.
If you look at strict cap rates, right now cap rates in my town, for example, I live in a college town, people are buying rental real estate apartments at cap rates of 5%.
I would never do that. We’re talking about whether interest rates are manipulated or not, but the fact is they are at historic lows and that is flowing through every single asset class.
Not only are they at historic lows, but there is even chatter about having negative interest rates. We may follow what other countries are doing, in terms of going negative on the Fed funds rate.
You could. For example, right now about 30% of countries around the world have negative interest rates and some are severe. For example, Japan has negative nominal interest rates going out seventeen years. Almost half their yield curve is negative. You have Germany with interest rates of 0.5%. Then you have the US at 1.5%.
We live in a global market. The reality is when our nominal rates are 1.5% and they are negative on the ten years in Japan and Switzerland and they are at a half a percent in Germany, that puts downward pressure on US interest rates because you have global capital flows coming in and essentially, buying those bonds and pushing down yields. It is a global phenomenon. We live in a global market and you are correct. We could have even lower interest rates in the US irrespective of inflation just because of the demand for global capital moving around, trying to find the best yield.
This is one of things I like about you, David and your podcast, is its much, much bigger picture and it’s more global in nature. It’s good stuff to know and learn, you don’t have to be an expert in listening to your podcast or other people’s podcast about geopolitics and economics. I like to follow it because I like to the ask questions, “How does that influence me?”
To bring this back down, one of the implications of having low interest rates or negative interest rates is that if you are sitting on cash or cash equivalents, you don’t want to save that capital. You don’t want to be sitting on a pile of cash because ultimately what happens is you become a loser, savers are losers. I don’t mean that in a personal way, I am basically saying that if you are only getting a half a point interest on your cash, effectively, you are getting a negative rate of return because when you factor inflation into the equation, you are losing purchasing power every year on that cash. The best thing to do is to put it into equities or stock market as your cup of tea or hard assets like real estate or commodities or precious metals.
I agree. I always have some cash. I think everyone should have emergency savings, but irrespective to that, when I see many asset classes undervalued, I look at it on a portfolio basis. It’s probably 10% of my net worth. I realize that loses money every year, but that’s essentially dry powder, that’s what they call it in the business with capital that I can deploy, if we get to the point where valuations or something gets more attractive. You’ll never know. That’s just how I’ve always invested, just having something that I have never felt compelled to put all my money to work because it’s sitting there.
I learned that from, probably more than anyone, is Seth Klarman who runs the Baupost Group, a hedge fund. He managed for one of my clients. They have been with this hedge fund for 20 years or more. He, at times, had 40% of his portfolio in cash. It wasn’t like the rest was all levered up. He could still generate a low teen to mid teen return. Now, he is a brilliant investor. Nobody can invest like that. Cash was there to protect and wait for opportunity. If the opportunity isn’t there, if real estate’s too expensive, or you can’t find the property, then sometimes it’s okay to wait until the right opportunity comes along.
I agree with you. I wasn’t referring to a rainy day fund or emergency cash. I am talking about investible cash. You have a percentage of it in cash, dry powder for the next opportunity. The rest is deployed across real estate and/or equities or whatever the case is.
Exactly. It gets back to in which case, people are afraid often of volatility, of losing money. In your example, somebody holding cash is, you’re losing money on a risk inflation adjusted basis.
Volatility is actually hitting the nail on the head. We have clients that call us and say, “Look, I’ve got half a million or a million in the stock market. I am running scared. I am a little nervous,” or whatever the case is and they are looking to divest, not necessarily liquidate their entire holdings in the equities market, but they are saying, “Look, I am getting nervous about the gyrations, the ups and downs are getting larger. It’s not uncommon to have a three-digit swing one day and a three-digit swing the other way, the next day.” I think they are looking for something with a little more consistency and that’s why they are calling us and they are saying, “I need help in diversifying it to other asset classes.”
That’s not an isolated case. I think you are seeing that around the country. I think that’s one reason you are seeing valuations of real estate go up. An example, I had a realtor friend approach me. He had built a twelve plex in this college town, fully rented, brand new building. His buyer was essentially buying it through his individual retirement account, buying the entire building, going to borrow 50% and put up 50% equity and the cap rate was about 5.5%. It was very, very low. Obviously his cash-on-cash, it was higher because of the debt.
I ended up lending on it because I caught around the bank. There was very few banks that will lend on individual retirement accounts because they can’t get a personal guarantee. My yield on that debt piece is higher than his return on the equity, at least on a cap rate basis. The reason is because people are afraid of the stock market. They are going into real estate. I don’t think anyone should put their entire retirement into one building, because I think he’s going to be fine but the reality is, anything could happen. Anything could happen.
That would be silly to be in one property in one market and that is it. To me, I have this very, very general rule of thumb and I call it three to five in three to five. It simply means just acquire a portfolio in one market of three to five properties, maybe more, and then diversify that asset class of real estate, income real estate into another market and purchase another three to five, and then a third market of three to five. At that point, you’ve got ten to fifteen properties, maybe more, and that’s to us, how we diversify geographically across the country within the asset class of real estate. Now, there could be other things in someone’s portfolio like fixed income or equities and what not. I think that’s an important point to diversify your real estate holdings, not have one building on one block in one market. That to me is risky.
It is, but they do it.
I want to tee up my next question by just asking you to very briefly cover the question, what is inflation and what causes it? I’ve already covered this in the previous episode on my own, but just for new listeners, just tell us exactly what is inflation and what causes it?
In terms of its exact measure is countries around the world, there is statistically agency, they take a reference basket of goods, so there’s food, there’s energy and there’s rents on essentially the housing component, healthcare. They add it up and they see what does it cost to buy this representative basket of goods? They compare that basket of goods to the prior period. If the basket of goods is going up over time, then that’s what the inflation is. It’s just the change in those overall prices and they measure it, it’s called the Consumer Price Index. There’s different measures because there’s different baskets of goods.
Now, the question is what causes it? That’s not an easy question to answer because there is a psychological component to what causes inflation. In other words, you look at Venezuela right now. I think I saw this morning inflation of 1600%. Part of that inflation is caused by demand for goods. If your capacity constraint in terms of a country’s ability to produce goods and services, so you have a constraint capacity. At the same time you have more cash being created, in a perverse situation like Zimbabwe, you have the government printing cash. Potentially you have that situation in Venezuela. That cash is now going after the limited capacity to produce goods and services that causes prices to go up. If you think, prices are going to go up you often go and purchase a good now because it will go up tomorrow. That can further constraint capacity and push up inflation even more.
The primary measure that causes the amount of cash in the system to increase is banks, bank lending. I have episodes on the show, I think it is called How Money is Created and Destroyed. What people don’t realize with the banking system, we were taught in college or in school that banks, all they do is they just lend money that’s already there. No, that’s not exactly how it works. When the bank lends money, they actually create the money by doing an accounting entry and they create the deposit. If I go out and then borrow money from a bank, that loan is essentially an asset of the bank. They do a little balance sheet and they say, “David’s got a loan.” Then they put a little accounting entry on their bank and they put a deposit. They don’t go find the money, they create it. Bank’s lending expands the amount of money in the system. Apparently, we have banks doing excessive lending that can also cause inflation or when they’re reducing lending that can put some deflationary.
That’s a long winded, perhaps complicated, perhaps simple explanation, but it’s multi-faceted, essentially the price of good going up either because of restrained capacity or because of an increase in the money supply.
We could literally have a full episode on almost every one of these question that I may or may not ask you. Listeners, you need to keep that in mind that these seem like short questions, but the answers are pretty elaborate and can be pretty in depth.
I think, David, what you are saying is that because of this system, some people may refer to as Ponzi scheme, but this system of fractional reserve banking for every dollar you put into the bank, the bank can now lend out ten times that amount of money. That cash, that currency floats through the system and as it increases, it creates more supply of money chasing after fewer goods. Therefore the net effect that you and I, the average Joe on the streets sees is that prices get pushed up. We call that inflation. It’s really just the increase in the amount of currency in the system, but we see it as prices going up.
I had to ask you that question to tee up the next one because you’ve got this article, which is great. It caught my attention immediately. It’s Why You Shouldn’t Pay Off Your Mortgage. We, all our investment counselors, we talk to clients about this as one of the many benefits of having real estate as an investment but more specifically having fixed rate debt attached to that investment. I am going to let you take it from here and explain why you wrote this article and why you suggest not to pay off your mortgage and what the reasons are for that?
I started with the fact that my mortgage is paid off, because all the reason for not paying off your mortgage, they are all financial and they are quantitative. The basic reason is, houses over time tend to, unless you happen to be in a very supply constraint area like Orange County, California, they tend to track inflation. The house is going up relative to inflation, generally speaking at best. Obviously, you have maintenance costs, but if you have a fixed rate mortgage, you are paying off that debt with inflated dollars. Over time, you essentially are getting the benefit of inflation, because inflation hurts people that have assets that aren’t, like we talked about early, that aren’t generated when you turn greater than inflation. If you have an asset that’s increasing relative inflation, yet you have funded that with debt, inflation actually benefits holders of debt because they are repaying back their mortgage with essentially inflated dollars.
That would be the quantitative reason to not pay off your mortgage. The reason to pay off your mortgage was the reason, I just hate, I just didn’t like having a debt. I hate making payments. Some people are just comfortable especially in their home, just not worrying about it. I have degrees in financing, I can give all types of quantitative reason, but at the end of the day, our family just felt better just having it paid off.
That may be true with the principle residents, but when you are dealing with real estate investors as we deal with, sometimes the question comes up, “Should I get a mortgage? Should I buy it all cash? If so, how much should I finance? Should I get a 30-year fixed or a 50-year fixed or an adjustable rate?”
In my opinion, one of the ways to look at this is the best deal going is to get a 30-year fixed rate mortgage. With interest rates, mortgage rates so low, near or at historic lows, you should get as much of that cheap, cheap money as you can. Attach it to an asset that produces income, have your tenant pay if off. Not only are they only paying it off, every year, you are paying that mortgage off in cheaper and cheaper dollars. Your $500 mortgage payment today might look relatively large, but in ten years of fifteen years from now, that $500 payment is going to look quite small, very small.
That is the exact way to do it. It is a one advantage as real estate investors that we have. Yes, valuations might be high for different asset classes, but debt is really, really cheap. That’s what you see in corporations do. Corporations are going out and they are borrowing at very, very low interest rates to take advantage of it. It’s the opportunity for individuals to do the exact same thing.
There was an article, actually, just yesterday I read on Bloomberg. Apparently, because interest rates are so cheap now that the regulators have freed up some regulation, there are a lot of companies that are actually buying up their own stock to the tune of tens of billions of dollars. They are taking advantage of these low interest rates, so if they are doing it, there’s no reason why we shouldn’t be doing it. We should be doing the exact same thing.
If you can qualify, I have to admit, we have rental real estate property. After doing that episode that I talked about that you referenced, I thought, “I should go get a mortgage on this rental property that we have.” I went to the bank. As I mentioned, I left my job three or four years ago, so most of my income is from investing in other things, but there is not a steady paycheck there. It was an absolute disaster to try and get a mortgage. I had the credit officer wanted me to explain all these K1s I had on my tax return, many of which were for ETFs or exchange traded funds or things that had nothing to do with businesses. She wanted me to produce the financials and I thought, “Oh my.” I gave up in frustration.
You need a better loan officer and a better lender.
I think so. That’s one of the downside to living in Idaho, I guess, unsophisticated banks.
I’ll hook you up. Call me later.
We ended up selling the property. Again, my thought process was cap rates are so low, and this was a property we converted as a single family home into a triplex. I was familiar with the zoning and so we made a return and I moved on.
Someone asked me a question when I was on a trip with my daughter. They said, “How do you make a million dollars?” I instantly turned to him and I told him, “Borrow a million dollars.” He looked at me for a second and I had to explain it to him, but essentially I said, “Go out, buy as much property as you can, acquire a million dollars in debt financing to acquire that real estate, that portfolio. Of course, the assumption here is all those properties are positive cash flow, so you have your tenant paying it off. Guess what? In 30 years, 20 years, 15 years, however you accelerate those payments, you are going to have millions of dollars in net worth. That’s how you make a million dollars. Borrow a million dollars.”
There is some truth to that. I saw that in the institutional investment world. When I look at from private equity firms to the commercial real estate investment partnerships we invested, they all use debt in order to generate the return. The question is how much debt it is? How much leverage to use? Because it can also, as you know it, it can bite you if you have too much leverage and the market is not working in your favor, which gets back to earlier point to have it in different markets, different real estate types. Be prudent in the use of leverage because what works to create wealth, can also destroy wealth if you don’t go about it right.
Exactly. That just means buying prudent properties or, as you talked about, any kind of investment, any kind of asset, but you buy it right from the very beginning where it makes sense. It has to be a prudent investment that pays for itself. That’s the way you protect yourself and you minimize your risk.
I’m going to try and wrap this up here in about five minutes because I know you have a call at the top of the hour. One of the concerns that some of the investors that we talked to bring up those people who are kind of more big-pictured, they are wondering about where the economy is headed and sometimes you have to look in a crystal ball and try and make some predictions based on what you know. Do you see us facing a depressionary environment over the next few years? Because some people refer to that simply as a market correction, but it can be worse than that.
I don’t look out two years. I don’t think anybody can. Say, we are going to face depression. There’s some risk out there. One, in fact in the episode I am doing this week, 116, I talk about the significant build up in debt in China and the potential. They have a banking crisis that could flow over around the world. That’s a potential risk.
Back to my earlier comment, looking at the leading edge of the present is I look at something anyone can do. They are called Purchaser Manager Indexes or PMI. These are surveys done around the world where they ask businesses, “How’s business? How’s your new orders? How’s your employment? What are prices like? How’s your inventory levels? They are regulated to where it comes out or standardized when it comes to it, if it’s 50 or above, there’s been typically an expansion in economy. When it’s been 50 or below, the economy is slowing. Generally, when it’s below 48 to 47, that gives a high risk of recession. Right now, when we look at globally where are we, the PMI is about 50.5. That suggests the global economy is close to stagnating but still expanding at a very slow rate. That’s where we’ve been for the last few years. When you look at the PMI in the US, it’s above 50. That’s the most reliable indicator I can find.
You can go and look at all these surveys. It’s Markit Economics, put it out, you can Google Markit Economics. They do press releases. You can look at what PMIs are around the globe. When I look at that, I go back to, I look at investment conditions. In my mind, investment conditions right now, they are neutral. The economy, it’s neutral. The risk of recession is higher than normal since we are close to stagnation mode, but it’s not saying we are entering into a recession. When we look at valuations, I mentioned the US stock market is overvalued, other stock markets are not so. Other asset classes, some are overvalued, some are fairly valued. That’s what I look at. Finally, I look at the level of fear and greed in the market. That’s the swing signal that’s always moving back and forth all the time.
I don’t think anyone can predict the global depression in the coming years. I don’t think anyone should invest for fear out of that, because many people do. I think that, you look at what’s driving returns. You look at where we are currently. Then you have different portfolio drivers both in the public side, as well as the private side including rental real estate and you’ll be fine.
Based on what you are saying, it sounds like we’re going to continue to see a mild inflationary environment for the foreseeable future.
I think we will see a mild inflationary environment. I think you are going to see very, very low interest rates. There is nothing to suggest given what Central Banks are doing, given just the sheer amount of savings in the way capital flows around the world that suggests interest rates are going higher, significantly higher anytime soon. As a result, people need productive assets that can generate some income to outpace inflation because you are not going to do it just sitting in bonds.
That’s a perfect environment for a real estate investor. You have a mild inflationary environment, low to no risk of recession, historically low interest rates. That’s a perfect environment because real estate, as you know, has intrinsic value, it’s durable, it maintains its value, it keeps pace with inflation. You can borrow money to purchase it and then you can turn around and lease it to generate income.
I agree. The only key is you got to buy it at the right price.
The right place and the right price.
You’re right. The right place and the right price.
Exactly. I sound bias, of course, that’s why I love real estate. Sure, I invest in other asset classes, but by far I like real estate. I know that’s not your cup of tea but it’s okay.
As I mentioned earlier, it’s a tool. I have real estate investments. I use it. It’s a good 30% to 40% of my investment portfolio. It’s not as if I’m not a real estate investor, but I certainly don’t do it to the extent that you, and I’m sure many of your listeners do.
I am just mentioning it as a matter of fact, not that one is better than the other. It’s just a vehicle. You call it a tool. I guess in wrapping up, you have talked about this, you’ve kind of danced around it a little bit, just lay it out, what is your personal investment philosophy in generic terms at a high level?
Long term, keep fees low and have multiple drivers of the portfolio. I am very diversified and I own many different asset classes including real estate. I own gold coins. I own stocks. I own bonds. I own investments in venture capital in Timber. I want as many things working in my portfolio because I can’t predict the future. I don’t think anyone can accurately predict the future. In that environment, I want to have as many things going on both things that are tied to the public market, but I also want pockets of independence, so that if we get a situation where everything collapses, I still have a piece of ground I can grow some corn on. Not that I’m predicting that, I just think that’s just prudent living.
You are a wealth of information. I really tried to abbreviate this episode because we are up against a time limit. Just in wrapping up, is there anything else you’d like to share with our listeners before we close?
Like I said, it’s a great podcast. I do listen to it on a regular basis. It’s very well done. I encourage our listeners to subscribe. David, thank you so much for your time. This has been great. I will continue listening to your stuff. Maybe we will have you back on the show later this year.
Okay, great. Thanks. It was fun.
I hope you enjoyed the show. It was interesting and entertaining. I hope it was not too complicated. Some of the stuff can get very messy and intricate and detailed, but I think the more you listen and learn, the less complicated it gets. At the end of the day, a lot of the stuff is really not that complicated. It just seems that economists and politicians like to use complicated words and phrases to label things and make things sound more sophisticated than what they actually are.
In any case, if you have any questions about real estate, real estate investing or the economy or where things are headed, by all means, just go to PassiveRealEstateInvesting.com, click on the Ask Marco button, submit your question and I will try to address that on the show. I may just reply to you directly depending on what the question is. Download our free report while you are there.
If you are considering real estate as an asset class to add to your investment portfolio, by all means, give one of our investment counselors a call and spend fifteen minutes with them just to see if it’s the right thing, the right fit for you. Remember to subscribe to the podcast. If you are interested in getting a free mug and you enjoyed the show, by all means, please leave us a rating and review on iTunes. That just helps us get the show out to more people. I will be more than happy to send you one of our free new mugs, the Keep Calm and Invest on mug. Just be sure to include your address. That’s it for this week. Thanks for listening. We’ll see you on the next episode.