Tuesday, March 10, 2009

Paradigm Shift

I want to briefly talk about personal finance outlooks, and how that relates to government programs to prop up the housing market.

I don't lease vehicles. My cars are paid for and I will drive them until they are worn out. When they break, I repair them myself if possible. I am also about 9 yrs away from being mortgage-free. I consider debt of any kind to be a huge threat to my personal freedom and happiness.

I also am an investor. Among my investments is 10,000 shares of stock in Rite Aid. "WOW" you think. "That guy must be really rich to afford 10,000 shares". Not so. I purchased the shares at $0.32 per share at a cost of $3200. Rite Aid stock is currently trading at $0.21 per share, so I am down about $1100 on this investment. No big deal. The entire investment in Rite Aid is speculative, so the original investment was mentally a write-off at the outset. This tiny portion of my investments I will call my "casino investment"

Two things to note about my "casino investment":
  1. I am using my own funds, rather than borrowed money
  2. The "casino" portion of my investment is a tiny, tiny fraction of my overall investment strategy
Here's where the paradigm shift came to me:

Suppose my Rite Aid stock purchase was instead a $500,000 house. Suppose further that I borrowed every bit of money (100% financing) to purchase my Rite Aid stock. Also suppose that the lender is willing to have my Rite Aid stock as full collateral on the loan I used to purchase the stock. And lastly of all, suppose that I am completely flippant and dismissive of debt, other than as it relates to my month-to-month carrying costs. My HOME is essentially a "casino investment".

I am willing to bet that there is a reasonably large group of Americans who view their homes as little more than a tax shelter, semi-permanent residence, and/or casino investment. I know of young-ish (and arrogant) realtors who "owned" as many as 6 houses simultaneously.

Meanwhile, back in the real world, a large number of hard-working Americans (who don't make a living skimming money from real-estate transactions) are losing their jobs in this downturn.

With these things in mind, how likely is it that the government's attempts to keep homeowners paying their mortgages (and thus keeping Bank of America in business) will succeed?


  1. why don't we try the trickle up economic plan. give the money to the poor and the money tickles up to the rich, it will end up in their hands anyway. Where have you been your last post was a month ago?

  2. The money spent propping up the banks probably would have been better spent propping up the less fortunate among us. We Americans are not doing a very good job of taking care of our children either.


    I apologize for the lack of recent posts. But as I said in the first one, I already have a primary job. It's been keeping me pretty busy recently. I guess that beats the alternative ;)