Position Versus Profit and The Dao of Capital

Jason Hartman starts the show discussing the difference between position versus profit. He discusses why we should be positioning ourselves for the post-pandemic rise of suburbia. The pandemic has given people fear of high-density living situations- elevators and crowded spaces. Jason discusses why he has been sticking with his real estate investing strategy even before COVID-19 and why it is now more appealing.

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Announcer 0:12
Welcome to the American monetary associations podcast where we explore how monetary policy impacts the real lives of real people. And the action steps necessary to preserve wealth and enhance one’s lifestyle.

Jason Hartman 0:29
Hey, it’s my pleasure to welcome Doug back to the show. He’s been on many times you’ve met him and seen him speak at our meet the masters and prophets in paradise events over the years. Also, he was the one who hosted the portfolio makeover games in various different iterations over the years. And it’s great to have him on Doug How you doing,

Doug 0:52
doing great, Jason? I mean, you know, as great as anybody’s doing, you know, with the world coming to an end, but yes,

Jason Hartman 0:58
well, we’re gonna get into the world. Coming to an And we’re not so somber about it either, as some are, but But speaking of the world coming to the end, maybe we’ll start right there you are right now really following more so than before. Mark Spitz Nagel, and it’s correct. He’s the hedge fund manager. He’s got a few books out another one coming out next year. But I believe you’re currently reading the Tao of capital, and that’s tau da IO, but pronounced tau i believe. And then the Austrian investing in a distorted world, with foreword by Ron Paul, who’s Of course been on the show and spoke at our meet the Masters event two years ago. So he’s really a doom and gloom investor. Right?

Doug 1:43
That’s correct. And to give the listeners a little bit of context, so Mark Spitz Nagel was a student of Nassim Taleb at New York University and I’m a big fan of Nassim Yes. And so to lab he wrote that fooled by randomness, Black Swan, anti fragile probably One of my favorite authors my game you must read in the

Jason Hartman 2:03
game again that’s maybe the most important one of all Yeah, go Yeah,

Doug 2:07
yes getting in the game and anti fragile I think are probably two of the are probably his magnum opus. Right. But and the thing that’s unique about Spitz Nagel, is that of course he has an obviously very bearish perspective, but University Capita booked a 3,612% gain in March of 2020. And if users are saying I mean, not users sorry. listeners are probably saying, Wait a second 3000. So 36 x Yes, 36 x. And because his whole strategy is about buying your it’s largely about options. It’s about buying options that are way, way, way, way out of the money that they can buy for almost nothing that normally don’t pay off. They normally burn capital in time decay. But when a crisis event happens, those types of things, just shoot up in value. And in this case, there was a crisis event. volatilities went up, the Dow went down, the s&p went down, the values shot up and they booked a whole bunch of gains. And so what we can learn from someone like Spitz Nagel is a his strategies because of course, the exact strategy is going to be hard for the regular person to implement. But the style of strategy, you know, as he says, The Tao of capital, what he talks about really is the idea of instead of focusing just on how much money you make, focus on how you’re positioned, so that you will be able to consistently move your position to take advantage of opportunities that come up, because a lot of times if you just try to make money now, what you’ll end up doing is you’ll end up locking yourself into a course of action that you can’t very easily adjust. And in the world right now, it’s really positioning yourself so that you can be flexible because nobody knows what’s gonna happen, you know, COVID could you know, it could Take another dip or it could be solved next week. Nobody knows. Right. And I think that’s the really important thing that a lot of people can take away from it. And I think that’s one of the things that you’re really helping people to do with your pandemic investing.

Jason Hartman 4:12
Yeah, thanks. I’m beginning to wonder, and I think a lot of people are, but this is sort of easy to say. And I can’t say it’s hindsight yet, but it feels like we’re getting into the the era where this is becoming it’s moving into the background a little bit, right. And everybody’s, well, not everybody, but some are now asking, you know, a lot more asking, was this just a massive overreaction? Of course, the conspiracy theories are flying. And some of those are definitely worth entertaining. I haven’t had much time to investigate any of them, frankly. But, you know, we’ve got to remember something folks, that if you’re in the US, or, you know, other countries have similar things, but you know, in the US we have a constitution, okay. And the government has Just frankly trampled all over that. And the First Amendment. The very first thing is that is not only the right to free speech, which, you know, I think we all pretty much have, unless you’re on one of the big tech platforms Facebook, Twitter, the rest which decide that they’re going to censor speech, which is absurd, Google, etc. But the right to peaceably assemble. Okay, so what if you wanted to have a political rally right now? You know, you couldn’t do it, right. It’s just something we need to remember that, you know, there’s, who knows, you know, no, but nobody knows. We may never know really what the significance of this whole thing was, and if we’ve overreacted or not, but Spitz Nagel now you quoted a 30 600% return, but I’m looking at a thing that says like 40 400%. I think that’s the annualized number. That’s for the whole that’s for the whole year.

Doug 5:53
I was for one month. Wow. In one month in March, it was a 30 600% return. Yeah. So He doesn’t do that every year.

Jason Hartman 6:01
Yeah. So what did he invest in ventilator stock, facemask and whatnot.

Doug 6:07
And so actually, I’m actually working with a friend of mine on a because I think he is his good friends with one of the deans of business down at Portland State. And so he spends a lot of time in the Bloomberg lab. And so one of the things that we’re working on doing is reverse engineering the trades of universe to figure out what their positions were. But from what I understand what a lot of what he invested in were things like say when the s&p when the s&p was at, like, say 3300. What he would do is he’d buy options at say 2800 or 2500, or something like that way, way, way out of the money, which it turns out hit. If you have an option that goes from super far out of the money to all of a sudden, now the market price is at the option price, your price just goes up a hockey stick curve. And that’s almost certainly what they did, because those are going to be your most liquid options. Those are the options you can get for the longest amount of time. You know, and then of course, you can also do things like you can cherry pick weak companies, you know, like, of course, when Tesla was trading at 900 bucks, that’s an easy long term put just go way, way out of the money because, you know, they’re going down, you know, a number of other overleveraged companies that are extremely fragile. You know, when you have a research staff that’s looking for companies like that you can you you can use financial derivatives very effectively. That way, you know, you can also use financial derivatives very ineffectively. But, you know, that’s how the game works.

Jason Hartman 7:26
What you’re basically doing is just betting on the long shot. And so the long shot bet is a cheap bet. And the odds are good, but again, are sorry, the, the odds aren’t good, the odds are terrible, but when it pays, it pays big. That’s what I meant to say. It’s like, you know, going to the horse races and betting on the horse that never wins. You know, it’s the odds are that you’re gonna lose your money, but you don’t lose much and the payoff is big. So exactly what what does this tell us for real estate investors? If anything, maybe nothing so,

Doug 8:02
so I think what it tells us for real estate investors is that in the case of Spitz nickel, he was positioned to take advantage when there was a big disruption, you know, now most real estate investors aren’t going to be allocating, you know, say like, you know, $50 million to university capital, you know, but you know, we just don’t have the capital base to play in that kind of game. But what we can do is, we can make sure that we are adjusting our personal portfolios so that we have the ability to be flexible, because I know that one of the ideas that you present in the pandemic investing is to segment your capital between right you know, between cash flow, your regular cash flow holdings, to have some speculation for upside, to have some hedging to protect against downside and to keep some of your holdings just in cash just in liquid reserves. And I think that construct is really important because what it does is it lets you shift your position as the market market evolves. For example, one of my clients that I was talking to recently, he has a property in the San Francisco Bay Area, that’s it’s a multiplex, it’s doing very well. And he was concerned about not being able to replace all the cash flow, if he took the equity out of that and then reinvested it someplace else, you know, ideally, someplace down like, you know, someplace like Texas or Florida. Well, but some of the conversations we’ve been having are that, you know, the Bay Area right now is basically at or very near a price peak. And of course, it’s hard to turn the market but it’s hard to imagine that the Bay Area is going to continue appreciating the way that it has in the future.

Jason Hartman 9:38
Will so one way when you say at or very near price pq you’re insanely optimistic if you go ahead, okay.

Doug 9:48
Well, and so that’s the thing. Yeah, the a lot of real estate in the Bay Area is actually probably down off its peak. Oh, yeah. And it’s not probably not gonna be back there for a very long time. Very long time. Because I think the The prior peak was 2007. And it took until I think about, what, three or four years ago, or something like that, you know, it took almost a full decade to get back to that those peak levels. And it’s very likely that it’s going to be at least five to eight years before the recent peak levels we saw just a couple months ago, before those can be replicated. So the question is, right, you know, if you can pull some equity out of, you know, of something that you have in a volatile market, like, say, the Bay Area or Southern California or New York, then what you can do is you can say, okay, you know, now you have some flexibility because you have a cash base. And for example, you know, he’s very fond of our LMS in Jacksonville. And so this particular client, he’s, he’s developed a very good relationship with one of our local market specialists down in the Florida area, you know, down in the Florida coast. And one of the things that he really likes that we talked about a lot is how there’s a lot of population that’s migrating toward Florida, a lot of population from the east coast is moving toward Florida, just because you know, the fit the favorable weather, the favorable taxes. etc. Well, when you have these population migrations, what it does is it puts upward pressure on both price and rents. In all likelihood in the near future, there’s going to be probably more upward pressure on rents. But at the area where our clients are investing, you’re also going to have upward pressure on prices, because you’ll have a lot of people coming down from more expensive real estate. And if we have a quality product that’s priced below median for an area, you know, it’s very hard. It’s very hard to imagine a situation where you wouldn’t have demand for those types of properties. So

Jason Hartman 11:32
this is such a significant trend and we’ve been talking about it on the shelf recording, you know, quite a while now, this mass migration out of high density, expensive areas to low density suburban areas. And it’s Think of it like this everybody listening. It’s like the person in Las Vegas who just won a bunch of money, and they’re, you know, they go out and they celebrate and they Spend money like a drunken sailor. And that’s kind of how it is. Or it’s sort of like, when, when we’ve, you know, there, it depends on the era, there have been times when, for example, Australian investors or from any part of the world, but I’ll use Australia as an example because that was a particular one where our dollar made our real estate look cheap to them. And they came here and bought up stuff like crazy. And even if the the investment wasn’t that good, they were simply arbitrage in the currency trade. Okay? Just the currency trade alone made the deal. Good. Okay. And, you know, that can work both ways, obviously. But when someone leaves New York City with the astronomically overpriced real estate there, and they sell their property, even at a loss or maybe they don’t even own but they take their housing budget, and they bring it to a place like Florida. It’s like everything looks super cheap to them. And so that they spend more freely. And when they spend more freely into the market that really puts upward pressure on prices. So this is the trend that is already happening to a small extent. But as these quarantines are lifted is going to really, really gain steam. And I’m not just talking about New York and Florida, I’m talking about any high density living anywhere, moving into lower density living where people can socially distance and feel safer. And, frankly, that trend was already underway. This is just putting it on steroids and adding rocket fuel to it because the trend was already happening. And we’ve reported on that for years and years, but now it’s got legs galore. And if you want to just look at some numbers for a moment, Doug, you’re a numbers guy for sure. Absolutely. Let me just tell you about rental units only. This does not I want to clarify, this does not include condos. This is only rental units, okay, mid rise and high rise buildings in terms of rental units. And during the pandemic investing webinar, a presentation that we will be announcing Soon, we will go into this in greater detail. But there are about 2.3 million of those units now that are mid and high rise. In other words, places where people are trapped in an elevator, a danger zone, and places where most of the time people are using mass transit, another Danger Zone, that’s 2.3 million units. Now, each unit has maybe two people, for example, if only 15% of those people want to move, and I think that’s a small number by the way, I think it’s going to be bigger than that. Okay, now, just because they want to move doesn’t mean they all will move, whatever. I think there’s going to be a higher number than That in terms of potential movers, that’s 340,000 units needed. Spread that among 50. markets. That’s another almost 7000 homes needed in each market in an era when we already had before any of this a massive housing shortage.

Doug 15:24
Okay, and Jason, I’d actually like to append on what you’re saying. Sure. You’re saying there’s what 700,000 homes needed and they’re not 700,003 340,000

Jason Hartman 15:33
Okay. Yeah. 340,018% number move. Yeah, exactly.

Doug 15:38
Yeah, they’re not 340,000 outcomes that cost $750,000. He actually they’re 350 or 300,000 homes that probably need to be more in the to fit right around in that. Yeah. And then sub 250 which there’s not a lot of inventory,

Jason Hartman 15:53
right. Well, not only that, but think about if someone owns their high rise condo in New York. They sell it for $3 million. Or say they got to do a fire sale and they sell it for 2.5 million. So two and a half million dollars, they move to suburbia and to get a just a gorgeous home in suburbia, they can spend 600,000 now their housing cost has dropped dramatically. Everybody’s worried about the economy being so bad, but look at all the extra spending money that family now house look at their ability to buy additional rental properties and the upward price pressure that creates. Okay, so, I mean, our investors following our plan can just win win win. Now I’m not saying the economy is okay because I don’t think it’s okay at all. I think the economy’s got major problems. But the issue is it’s this war between the economy overall and the mass migration trend and how it affects real estate both rental and for sale real estate markets were targeting that you can find at Jason Hartman comm slash properties. There’s your There’s your Spitz Nagel hedge fund strategy in real estate, right.

Doug 17:12
Well, and I think that the the two ideas play in because in the Tower of capital, one of the things that Spitz nickel does is he contrasts while comparison contrast sent to versus Carl von Clausewitz, because in a lot of cases,

Jason Hartman 17:26
the art of war that’s sunsoo. But what and then what is Karl’s philosophy?

Doug 17:31
So Clausewitz was a Prussian military thinker in the early very early 19th century. And he his book is called on war. And it’s about via basically it’s about it’s about your tactics and strategy of warfare, but it’s really about how warfare is an extension of commerce and more aptly an extension of politics, meaning that the strategies that are used in warfare can be applied to you can be cross applied to many different net Many, many different spheres of human existence, right? You know, because a lot of people think, okay, war is just killing people. Well, not quite. There’s a lot of strategy involved. And the strategy is, how do you position yourself so that your consumption of resources for maintaining your standing army, your ability to defend and your ability to attack plus counter attack are all optimized, you know, because what a lot of people do, especially in the era, is they’d immediately go for a quick win or they go for a, you know, for a visible win. In our case, it would be somebody who’s going for as much money as they can make right now. But what that would do is that would lock them into that that would lock them into certain positions that would limit their flexibility. And so what would happen is you’d have say, for example, one general who would retreat their armies someone would pursue after them, they’d get overextended and then they could turn their flank and actually defeat a much larger force with a small concentrated for us. The the I think the extension to investors is that flexibility is really Important. So like, for example, you’re talking about, say somebody who moves out of the city and moves into the suburbs. And then now they have some extra capital that they can hold reserve and they can use to start buying rental properties. And because I like some clients that I’ve had, they’ve said, Okay, well, you know, I’m, you know, I’m going to liquidate some holdings, I’m going to have some capital, I’m wondering whether I should deploy it all at once, or that I should hold sit on it or what I should do. And my you know, my advice is usually to just make a plan and follow the methodical plan because it might be an L shaped recovery, it might be a U shaped recovery, it might be a V shaped recovery, we don’t know. And so you know, what you do when you don’t know is just make a plan and be methodical and consistent because then that gives you flexibility. So instead of buying say 10 houses right now, maybe you pick up two and then two more, and then two more and then two more, but by just being methodical, what that really does is it you know it, it gives you that flexibility and that positive movement that will that will really help you adapt To however the market unfolds, because we don’t know.

Jason Hartman 20:03
Right, and Is that another way of saying dollar cost averaging? Exactly.

Doug 20:08
Yes, that is a although, you know, yeah, that’s a way you know, it’s basically averaging in or your dollar cost averaging, you know, the way that you would do that, the way that your financial planner would recommend doing that, is to just basically put the same amount of money into a mutual fund every single month.

Jason Hartman 20:26
You know, a lot of their fair warning, though, a lot of times dollar cost averaging, is just being used particularly by the Wall Street cartel, to essentially just get you to keep investing in crappy investments. So, you know, to be fair, I mean, the concept certainly makes sense in some ways, but it’s also used as a cover, which is what I hate about it, you know, so

Doug 20:53
And see, that’s the thing yet yeah, averaging can’t turn a bad investment into a good one. what it can do is it can smooth out your time Timing, so that you don’t have to try to figure out the exact top to

Jason Hartman 21:04
bottom. Right, right, which nobody can figure out. Okay. And that is correct. And that’s, that’s definitely the thing. So good stuff. You know, let’s talk about market timing for a moment, then we’ll wrap it up. So the market timers, always I find them incredibly frustrating and silly. And here’s why. Number one, they say things like this, well, I’m going to keep my cash so I can pounce on all the deals during the next recession. And I’m going to really profit by doing that. Well, that’s what they say. But then what they forget to say is that they said this in 2013. And they waited seven years for the pandemic to happen or the recession. We got it this way, which it was coming anyway, because it’s always coming and they lost out on the opportunity to get any return during that time. Because they were in cash. So they didn’t buy those real estate deals because they thought they were too expensive. They didn’t buy the stocks because they thought they were too expensive. So they missed everything. And taxes and inflation ate them alive. So they never calculate the return, they lose by waiting. That’s a dog that doesn’t bark, because it’s an opportunity cost. And then the other thing that happens is when it comes to real estate, they don’t consider their mostly lack of ability to obtain good financing. It’s amazing, Doug, how myopic people are. I hear all these economists like these supposedly brilliant people. One that I’m particularly frustrated with is Robert Shiller, Nobel laureate Robert Shiller, who completely, completely misses the whole concept of real estate. He acts as though everybody buys real estate with cash. And their only return on the real estate is the nominal appreciation rather than the multi dimensional benefits of that investment. That’s one thing. Another thing is his index is two thirds weighted on cyclical markets, super frustrating. But the thing they don’t consider these market timers is the price of the money. They think they’re just buying the house. What they’re really buying is the mortgage. And they say, well, housing prices have gone way up. In fact, they’re at the price they were before the last peak. Okay, and then what happened we had a recession. But what you didn’t notice is what the mortgage payment was at that time, versus what the mortgage payment is today. That’s the true cost of the house. It’s not the price. It’s the payment. People don’t buy houses on a price they buy it on a payment. If they bought it on a price houses would hardly Appreciate it all. They’re buying it because the payment is affordable. Not because that price they don’t care about the price. Nobody says, Oh gosh, this house is $400,000 so it’s too much for us. No, they say okay the payment on this house now is only $2,000 and gosh you know we were looking 12 years ago and the payment on a house like this they don’t care about the price just a house like this square footage, age neighborhood, etc. Okay, was 20 $800 it’s cheaper now. Houses are cheaper. Okay, because you evaluated on a payment not a price. Oh, my God, that seems so simple. But apparently Nobel laureate economist can’t seem to figure that out. blows my mind off.

Doug 24:47
Yeah. And and also, I think it goes even a little further than that. Because a lot of cases people it’s like you say you want to evaluate on a nominal payment, but if you evaluate under real payment and then deflate for constant value, dollars. Oh, yeah,

Jason Hartman 25:01
very good. Yeah, sure.

Doug 25:02
Yeah. That the real cost of owning houses it’s actually surprisingly affordable. It’s It’s

Jason Hartman 25:07
It’s incredibly cheap. Really? Yes. So inflation adjusted real dollar mortgage payments. That is the only real metric you should give a lot of weight to. Of course, there are some other things, but that’s the one you really look at. And, you know, it’s stated fairly clearly in the housing affordability index. So there you go. Don’t get any final remarks to wrap this one up.

Doug 25:34
Well, I think the main thing is just that, you know, there’s there’s a lot of fear out there and I don’t think people need to be afraid. I mean, cautious, yes. aware, yes. But afraid. No, there’s going to be opportunities. And, you know, for people who are paying attention and taking action there, you know, there’s no reason to think that you know, that you know, that the future is going to be you know, is going to be blighted, you know, the future is going to be difficult for a while. But then it’s going to be the future. And there’ll be opportunities. So just take them.

Jason Hartman 26:03
There’s always opportunities always opportunities. Good stuff. Doug, thank you so much for joining us. Anybody can have you help them with their investment purchases, go to Jason Hartman calm or reach out at one 800 Hartman and until tomorrow, happy investing, happy investing. Thank you so much for listening. Please be sure to subscribe so that you don’t miss any episodes. Be sure to check out the show’s specific website and our general website Hartman. Mediacom for appropriate disclaimers and Terms of Service. Remember that guest opinions are the rain. And if you require specific legal or tax advice, or advice and any other specialized area, please consult an appropriate professional and we also very much appreciate you reviewing the show. Please go to iTunes or Stitcher Radio or whatever platform you use. You can write a review for the show we would very much appreciate that and be sure to make it official and subscribe so you do not miss any episodes. We look forward to seeing you on the next episode.

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