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Originally Posted by freddyg12
First off, I think you're talking about individual investors in the real estate market. Sure, some of them took a serious beating, but countless others have inventory that they are holding onto & waiting for the market to appreciate it, i.e. good long-term investing. The people you speak of are part of the financial crisis, but the biigger problem were mortgage backed securities on wall st.
Your example of risk assessment is pretty much calling thousands of successful developers & real estate investors a "moron." (btw, $80K profit is really good for a $400,000 investment, that's 20%)
Capitalism requires risks. If no one took the risks you speak of, there wouldn't be much entrepreunership in the US, and in turn we'd have a lot fewer goods & services.
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We're getting off-base here because we're starting to talk economy, but I can't let these statements go without addressing them.
The mortgage backed securities were essentially the same thing. They created investments which were insanely leveraged, and were dependent upon the continued growth in real estate prices in order to support the fundamentals. As soon as the prices dropped, you had an asset that couldn't be unloaded, and you were stuck riding it down.
A 20% profit would be nice if you had a debt to equity ratio of about 1.0. But taking out a $400K loan when you only have $50 - $100K in the bank is foolish because of the risk you face. You have to liquidate all of your personal assets just to cover the cost of ownership. Not intelligent assessment of business risk.
There's calculated risk, and then there's foolish risk. Nobody advises anybody to put 100% of their savings in one stock, it's a big risk but that doesn't make it a wise one. A smart risk might be flipping houses to the extent you have cash to cover the cost of the investment. Or a smart risk might be to put your money in a
diversified set of aggressive investments. But leveraging yourself beyond your ability to cover the debt is never smart, it's business 101.