America is in a unique position on investment returns, suddenly favoring speculation over income investing. And why not? Whether it’s Bitcoin or Tesla, values are simply based on “what people think things are worth” according to Mark Cuban. Whatever happened to the old-fashioned tie-back to earnings? In this Mobile Home Park Mastery podcast we’re going to discuss how America has entered the danger zone on valuations and how income-investing is the only way to avoid the inevitable collapse.
Episode 213: Values And Gravity Transcript
Newton's law of universal gravitation is very complicated. It's known as the formula F equals G times M1 times M2 over Y2, but all of us mostly know it is simply that which goes up must come down. This is Frank Rolfe, the Mobile Home Park Mastery Podcast. We're going to talk about values and gravity.
Right now I see an alarming trend in America, particularly among investors, who have started to believe the nonsense that everything in the world of investment is based on speculation. Bitcoin, Tesla, the examples are everywhere around us. Mark Cuban says now that the only things have in value is what we believe them to have in value. Of course, that's a likely story from someone who made their fortune off broadcast.com, which is again, part of a bubble.
Now, income properties, on the other hand, are based on actual performance. So that's to me the big difference between speculative items and income items, because income properties have a very delineated value based on what they produce. So if you look at the things out there that actually produce money - CDs, bonds, dividend stocks, and income real estate - they all share the same inherent principles. They can't go way up, unless the income goes way up. But they also can't go way down, unless the income was to plummet.
Now, the Canadian stock market is very different than the US stock market in one attribute. In Canada to go public, if you ever looked into it, it's based on your dividend. In fact, you can't even go public in the Canadian stock market unless you have a dividend. You have to have some form of income and they rate that form of income as a value, and that's what you go public at. However, in the US, we're all about speculation. That's the heart and soul of the US stock market. And you're seeing that very clearly right now in the stock market's behavior. Endless bad news only yields higher prices, because there's simply no tie back to reality.
Now, I thought it'd be interesting look at the five stages of a bubble because I lived through multiple bubbles. I was in the dotcom crash, I was in the Great Recession 2007-08. These are the five stages of a bubble. First stage of a bubble, this is from Investopedia, is when investors become enamored by a new innovation or development, such as an extended period of low interest rates. And the second stage is a boom as prices tiptoe higher at first but then pick up speed as more investors jump in or out because of fear of missing out. Stage three, euphoria in which cooler heads don't prevail and market momentum is driving the way. Stage four profit taking dairy which investors who believe the bubble will soon pop start cashing out. Stage five panic, an event or series of events causes the bubble to burst and stocks to tumble fast. So those are the five stages of a bubble.
Now at what stage do we feel we are currently in? Well, we're not in stage one. People have already taken extreme excitement in things they've seen out there in technology and low interest rate and other items. And we're not really in stage two because prices are not tiptoeing higher, they're leaping. We're kind of in stage three which is the euphoria stage. That's why you're seeing the stock market surging and everything surging It doesn't matter what the news is. Doesn't matter, COVID reemerges it still goes higher. Interest rates go up it goes higher. We botch Afghanistan, it still goes higher. It doesn't really matter what you do at this point because everyone is driving markets through euphoria. But we all know that stage four is coming soon, profit taking. You already see the articles out there, you see a lot of the larger more professional investors just selling out of their positions, cashing in because they know can only go down from here. And then of course coming up in the theater near you within the next probably 24 months will come panic.
So how do you protect yourself and your family against this bubble phenomenon, this feast and famine that goes on? Well, I would say the best way to hedge the boom and bust, the gravity of investing right now, is simply to invest in income properties. Now we can properties are not perfect. Let's point that out. Number one, they have no enormous run ups. You don't ever see an income property bubble. Because the value is actually based on a tangible thing which is income and unless income skyrockets then the values can't skyrocket. But at the same time, you don't have that enormous jump up, you don't have that enormous drop back either. That's the hallmark of speculative investing.
Then also remember that all income properties do have their own cycles, there is a time to buy and a time to sell. But they're not typically marked by giant feast or famine events. They're more marked by more moderate values and increases in values. Now income properties do have the unique feature that speculative items never have, and that is that they actually pay a monthly or quarterly or annual dividend. And this is money that you can then use to live on. You can't really sell or eat paper shares of some stock, such as Tesla. So really, your only value in those kinds of investments are what you get at the end when you sell. Until then you have nothing to show for it.
Now, what will make mobile home parks particularly as an income property do well, in the months and years ahead? Well, number one, our rents are ridiculously low. I've talked, written articles about it now for a decade at least. And yet I've been proven right continuously. At an average us lot rate of $280 a month, there's nowhere to go. But up our rates are about $1,000 a month less than every other housing option in the markets that we serve. And that's ridiculous. Our product I think is better. So why in the world if our product is better, are we priced $1,000 a month lower? I don't know. No one can actually answer that question. If you bring that topic up, all you hear from people is groaning, eye rolling, "Oh, gosh. You know, I don't really know." But yet, I think it's very important point. Those who haven't actually been out in the sales office selling mobile homes and renting mobile home lots have no idea of what a great value that we actually are. And I think that value will only be more and more appreciated going forward. Our nation's demand for affordable housing continues to rise. Single Family can't meet it. Apartments can't meet it. And the US government can't meet it. Try as they may, they have not a single program or plan on the horizon that would even dent the surface of the demand for affordable housing.
Also, mobile home parks have that one item which Warren Buffett lovingly calls "a moat," which means we have a protection from the various cycles that other real estate sectors do not. Our values don't go up and down based on overbuilding. Unlike Self Storage, which recently is built around 5 billion square feet waiting into the pandemic, and now they're seeing declining occupancy and declining rents in many markets, mobile home parks have no such overbuilding. That's because they haven't allowed new ones to be built in about half a century. So as a result, the supply and demand function always remains very healthy with what we do. And all American megatrends point favorably for mobile home parks. Everything from the 10,000 boomers a day retiring and downsizing, to the fact that millennials now love to live small. It doesn't matter what you want to point out is some big trend going on. Well, mobile home parks are pretty much on the right side of it.
It takes someone like myself who's over 60 years old, to let younger investors know who have not seen them in the past, that American investment markets are marked with bubbles. They go back way back to early, early world history. I think the Dutch tulip ball bust is the first one you read in your economics textbooks. But we've all seen them. You just have to be old enough to live through them to see the carnage that happens. The euphoria portion of the bubble is fantastic. Every day opening the paper or looking online to see that your stock has risen ever higher. And you can't really explain why, but you think "Gosh, isn't that neat?" However, when you start seeing those stocks, always going down every day, no matter what happens, that euphoria quickly turns into sadness, and panic. And I truly believe you'll be seeing that within probably the next 24 months, you will see the end of the bubble, the start of the drop. And those who own mobile home parks will be fully protected from that. They will be happy, happy they never engage in investing in Bitcoin and Tesla, and all these stocks that have no earnings and really no earnings on the horizon, but instead invested in that good old fashioned thing known as income properties. Because for income properties gravity is not nearly as big an issue. This is Frank Rolfe, the Mobile Home Park Mastery Podcast. Hope you enjoyed this. Talk to you again soon.