Afford Anything - Investing is the Art of Probabilistic Thinking

Episode Date: January 20, 2021

#296: There’s a lot happening in the market. The Dow is at a new high, there are runaway stocks causing irrational exuberance, and yet, unemployment claims are on the rise. How can this be? To make sense of this, we discuss how improving judgment and using mental models can protect us against risks and short-term thinking. We review one question people rarely ask that might save them from making costly investment mistakes. We then wrap up with a discussion on the so-called death of cities, and what this means for real estate investors. For more information, visit the show notes at https://affordanything.com/episode296 Learn more about your ad choices. Visit podcastchoices.com/adchoices

You can afford anything, but not everything. Every choice that you make is a trade-off against something else, and that doesn't just apply to your money. That applies to your time, to your energy, to your attention, to any limited resource that you need to manage. Saying yes to something implicitly means. Saying no to alternatives. And that opens up two questions.

First, what matters most? Second, how do you align your decision-making to reflect that? Answering those two questions is the purpose of the Afford- Anything podcast. that is why we exist, and it is a daily practice. The recognition of opportunity cost, coupled with decision-making, is a lifetime skill. Something that we strive to be a little bit better at every day. My name is Paula Pant. I am the host of the Afford Anything podcast.

Typically, every other week we interview a guest, and on the weeks in between, myself and former financial planner, Joe Saul-Sehigh, answer questions that come in from you, the community. We will return to that format next week, but today I wanted to break format and do a solo episode because there is a lot happening in the market right now. The Dow is at a new high. There are some runaway stocks that are causing incredible irrational exuberance, given the very strange state of the market right now, along with the cognitive dissonance between the state of the stock market and the overall

economy as well as mounting uncertainty about the future, it seemed prudent to take a step back and dedicate a show to thinking clearly and refining our mental models as we try to make sense of what is happening around us. First, let's remember that the stock market is not the economy. To those who are wondering, how is it that unemployment claims can be again on the rise and, yes, the stock market is at new highs. The most basic answer is the stock market is not the economy. The market is a reflection of,

at its simplest form, two factors. One fundamental and the other speculative. The fundamentals of the market are based on cash flows. How much money, net, is a company bringing in, how stable is their revenue model, and through an assessment of those two factors, their revenue and the stability of their revenue, how much is their company worth? That is a

fundamental way of looking at a stock. There's also a more speculative way of looking at a stock. This more speculative approach does not look at discounted cash flows. It does not ask what is the present value of future dollars. Instead, it asks, what do I think other people will pay for this in the future? And it drives up prices in the short term based on the hope that other people in the future will drive up the prices even further. In essence, the very notion that the price may rise becomes a self-fulfilling prophecy and remains that way until it no longer is. Valuations right now for the overall market are incredibly high,

and when you look at certain large-cap stocks, particularly tech stocks, and I'm going to call out Tesla, the valuations are enormous. Right now, as of Friday, January 15th, 2021, Tesla was trading at a PE of nearly 1700. Not a PE of 17, a PE of 1700. To put that in perspective, that is multiple orders of magnitude off of where you might expect a different company to trade. And granted, it is true that tech sector stocks do tend to trade at higher PEs than something in the utility sector, for example, but not to that high of an extent.

What frequently happens when you have these blockbuster runaway stocks like Tesla or when you have other asset classes that have turned into blockbuster runaways like Bitcoin is right now, like cryptocurrencies are performing at the moment, a lot of buzz generates around these types of investments. And at the moment, if you go to Twitter, you go to TikTok, what you will see are TikTokers who are bragging about putting their $600 stimulus checks, which they refer to as Stimmy's, into Tesla stock and turning it into a billion more bucks. It is irresponsible investment advice. In fact, I would not even call it advice.

That is investmentainment. They're creating entertainment under the guise of investment advice. it's irresponsible. And when you see this play out in the form of some TikToker, it can be easy to brush it off as the actions of a handful of charismatic influencers who are shooting videos from their bedroom. But where it gets dangerous and what I have started witnessing more and more in the past few weeks, part of the reason that I decided to record the solo episode,

is I'm seeing major. platforms, platforms with brand names that you would recognize, that are marketing in ways that play to survivorship bias. I posted something in my Instagram stories the other day about a major website that styles itself as an investment education platform. They are widely circulating an ad that says, hey, if you had invested in Amazon when we sent out a buy alert, you'd be up 20,000 percent. We sent out a buy alert when it was $15.31 a share. If you had bought at that time, you would be up 20,138 percent. And that argument is 110 percent, an example of survivorship bias. That argument is textbook survivorship bias. That argument is 20,138 percent survivorship bias.

Because here's what they're doing. They're cherry picking. the winner without showing you what would have happened if you bought every buy recommendation that they've sent out in equal amounts. They cherry pick the one example of a winner, and they circulate an ad saying, look how much Amazon grew. Told you so. Oh, you should pay us for hot stock tips. That is not investment education. That is investment marketing. And I'm seeing more of it now than ever before. And I think part of the reason that it is so prevalent right now is you have this combination of people who are in an economically hard times, people who have lost their jobs, they've gotten furloughed, they've had their hours cut, they have their,

maybe you run a small business, but their customer base is reduced or the clients are reduced. So you have a lot of people who have taken a hit to their income, either they're unemployed or they're making less, or maybe they're making the same, but their employment is much more tenuous than it was before you have all of this economic insecurity happening at the personal household level combined with a stock market and a cryptocurrency market and a real estate market that are all going bonkers. They're all reaching new highs. And when you have that combination of economic insecurity on one end and what seems like a gold rush on the other side, Well, it's so easy for unscrupulous people and unscrupulous platforms to pray on those who don't know any better.

This is why the distinction between investment education and investment marketing must be made clear. Investing is the art of probabilistic thinking. There are no certainties. To be a good investor, you need to be a good investor. you need to recognize the range of possible outcomes, the likelihood of a given outcome within that range, the risk of ruin, meaning your ability to withstand that worst case scenario,

the relationship between potential risk and potential reward, meaning does the potential upside, justify the potential downside, and the appropriateness of that opportunity with your timeline, your goals, your risk tolerance and your risk capacity, because those are two separate concepts. How much risk you have the capacity to take on is not necessarily the risk that you have the desire to take on and vice versa.

All of those need to be addressed when you are thinking about what is the quote-unquote best investment for you. Furthermore, an understanding of mental models. How do our cognitive biases play into our decision-making? When we see an ad that says, hey, you should have bought Amazon when we told you to, that's survivorship bias. When we think about, oh, I should have bought Peloton or Zoom in 2019, that's recency bias. Do you remember in early 2019 when everybody was talking about the Uber IPO?

No, you probably don't remember that. You know why you don't remember that? Because even though it was super trendy at the time, the rise in the stock price of Uber. has not grown enough to make it salient in people's minds. And there is this thing. It's called the availability heuristic. We overweight whatever can most easily come to mind. And if something is an outlier, then we can think of it more easily.

I mean, the fact that I named Tesla right off the bat, rather than naming the RLJ lodging trust, or rather than naming the Pebblebrook Hotel Trust, that is a perfect example of the bias and preference given towards whatever is most salient. But what is most salient? What is most easily recalled in our minds is not necessarily the best investment. And that recognition, that awareness, that is one of many examples of the types of mental models, the understanding of mental models that we need to develop in order to become better investors. Investment education at its core is learning how to think.

It's thinking about thinking. It's metacognition. And what concerns me is that now more than ever, and I've been covering personal finance for almost 10 years, February 22nd is the date that afford anything started. It started February 22nd, 2011. So we're coming up on our 10-year anniversary. And in 10 years of writing and later podcasting about personal finance, I don't think that I have seen such a degree of trends, fads, marketing, hashtag Wall Street bets, stonks. I haven't seen this level of getting hot investment tips from the shoe shine boy in the almost 10 years that I've been covering this. And again, I go back to that notion that in a bull market, everybody thinks they're a genius.

This is another cognitive bias. It's called resulting, the resulting fallacy. The resulting fallacy is when you make conclusions based on the outcome or the result, rather than based on the soundness of the decision-making process itself. And so there are a lot of people who right now are just throwing their money at any given asset, like it's a dart getting chucked at a dartboard, and the asset that they threw their money at happens to have gone up in some cases quite significantly. And because no matter what you invest in, whether it's stocks or real estate or crypto, no matter what you're investing and you're doing

well right now, as a result, people are buying into the resulting fallacy. People are convinced that quote unquote, because it worked for me, that means that it was a good decision. No, it may have worked for you, but it might have just been because you got lucky. There is a wide distribution of possible outcomes, and there's also across the span of your adult life, a wide distribution of points in time. And a positive outcome, limited to a given point in time, does not a sound. investment strategy make. But people often need to learn lessons the hard way, unfortunately, and I hope that this

episode can spare a few people from learning investment lessons in a more painful way. Because, again, I go back to my earlier statement, which is that investing is the art of probabilistic thinking. I use the word art intentionally. Art in this context means judgment. it means making sound, guided, reasoned judgments through a refining of mental models, through a recognition of cognitive biases,

through an understanding of behavioral finance, all of this is the art or judgment of sound decision-making that is the foundation of investing. If something has an easy answer, then its answer holds relatively low value. There are clear-cut answers right and wrong, yes and no. But the people who make the biggest contributions to the field,

meaning the people who are winning Nobel Prizes in physics, the people who are esteemed professors and department heads in mathematics, they're the ones who even in those fields deal with the world of uncertainty. Even in fields that we typically believe are fields of certainty, they're the ones who are dealing with the edges of those fields, pushing the boundaries of knowledge, testing ideas, discovering what they don't know. Because the essence of any field,

the essence of knowledge itself is uncertainty. even in the sciences. And when we look at investing and we ask ourselves at an individual level, how do I become a better investor? It begins with embracing that uncertainty. That's not what investing marketers are teaching right now. Teaching is not the right word.

That's not what investing marketers are marketing right now. Investing marketers are marketing certainty. They're saying pay us money and we'll tell you what stocks to buy. Pay us money, and we'll just hand you a turnkey property. You don't have to do any due diligence. You don't have to bother learning the neighborhoods in this city or learning the elements of renovating a home so that you know whether or not the work that we did was shoddy.

We'll take all the thinking off your plate. We'll just do it for you. The marketers are saying, Just hand us your money and we'll crowdsource into a real estate investment for you. You don't have to bother wondering why it is that we chose to invest in a retail complex in Columbus, Ohio, rather than an office park in Lexington, Kentucky. It's up to us to weigh the pros and cons between those and to figure it out.

Just trust us. Don't even worry about asking questions. This is just a machine you feed your money in and we'll spit returns back out at you. That's what they're selling. They're selling the promise of easy money. They're selling the comfort of certainty, and particularly now when we are living in such uncertain times, that promise is tempting. It's compelling, but it's an illusion. Now, how all of this started was with the initial statement that I made about 15 minutes ago that the stock market is not the economy.

The fact that the stock market is not the economy means that the economy can stagnate, or decline with regard to jobs and income while the stock market can take off. We saw that in 2020, and we're continuing to see it now. The effect of that psychologically is there are many people who are unemployed or underemployed who don't see a whole lot of prospects for their work lives, but they see huge prospects in the investing world. And that's a dangerous combination. That's how you get this surge of people taking their stimulus money and throwing it at investments that they know nothing about.

Now, let me be clear. I'm not saying that it's a bad thing to invest your stimulus money. I'm stating that it's a bad idea to do so if it is speculation born of desperation. There is a difference between being a sound, strategic, sober-minded investor with a strong, strong understanding of fundamentals versus someone who is drinking the Kool-Aid that comes from the virtual water cooler. In a previous podcast episode, in the previous Ask Paula and Joe podcast episode, I made an offhand reference, a passing remark about Robin Hood Bros and Yolo Crypto.

And somebody left an angry comment. I mean, actually, it was not an angry comment. Somebody left a very thoughtful, very professional, a little bit offended, but in a very mature sort of way. A comment on the show notes of that episode stating that he invests in crypto, but he is not a crypto bro. Let me be clear, I have no objection to any choice that you make about what you invest in. so long as that choice is informed, educated, strategic, and sober-minded. I never said crypto-brose. I said Robin Hood bros. And I myself have a Robin Hood account. In fact, I myself have Tesla in a Robin Hood account. And I also have Moderna.

And I also had Peloton that I bought in 2019 and stupidly sold at the beginning of the pandemic, thinking that the pandemic would end, like back in the spring. So I totally, totally, totally get the temptation to make a couple of Wall Street bets. I do it myself. But there is a difference between taking a very small portion of your overall portfolio and confining your playtime to just this small percentage of your overall portfolio and incorporating that into a much bigger picture strategy. there's a distinction between doing that versus throwing your unemployment check at it.

You can be, as I am, on Robin Hood without being a Robin Hood bro. You can be a cryptocurrency investor without being part of the YOLO crypto crowd. The YOLO crypto crowd are that subset of my fellow millennials and Gen Z, whose approach to finance is, YOLO, go bigger, go home. and they don't have a 401k at their workplace. They don't have an IRA. They're putting all their money into this one speculative investment without proper risk management across all other aspects of their portfolio.

These are the people who don't have an HSA because they figure they'll just pay their health care costs in Bitcoin. And that is very different than being someone who has a 401K and an IRA and asset allocation. towards index funds and then decides to take a very small portion of their portfolio and open a coin base account with it. I realize I've given a handful of specific examples, but if we zoom out, the bigger picture here goes back to the X and Y axis, where the X axis is what you think. And there's this whole horizontal line that illustrates a spectrum of what a person thinks, but then that Y axis is how you think. And the how you think could be bottom, base level, or it could be high level, high-minded, considered, thoughtful. Your position on the

y-axis does not determine your position on the x-axis, and it is not your position on the x-axis that I care about at all. I care about your position on the y-axis. That's what makes you a good investor. That's what makes you good at honing your mental models. That's what makes you a thoughtful individual. Your position on the y-axis is what this show is about. So I want to be very clear that even though it may sound as though I'm disparaging big tech stocks like Tesla or individual stock picking or crypto or real estate crowdsourcing deals or syndication deals, it is not the choice of asset itself that is the inherent concern. The choice of asset itself belongs on the X axis. It is the thinking behind it, and the prevalence I'm seeing right now of that more base-level thinking, the speculation, the survivorship bias, the lack of contextualizing a given investment into a bigger context, a bigger strategy,

that's the real cause for concern. So again, it's not what you think, it's how you think. And it's not what you invest in. It's how you think about what you invest in. This is a show about how you think about what you invest in. So here's one question to ask yourself. Anytime that you find yourself interested in a new type of investment, whether it's a style of investing or an asset class,

anytime something peaks your interest. The question is not why, because there will probably be immediate reasons. the ones that are being most marketed about that given asset. The bigger question, why now? What is it about this moment in time that makes XYZ investment so attractive? For example, short-term rentals have existed. They did not start with Airbnb. Short-term rentals have existed for decades.

VRBO has been around for a very long time. They predate Airbnb buy a lot. The VRBO website, Vacation Rental by owner, they're calling it Verbo these days, started in 1995. And other vacation rental sites like Homeaway.com, they started 10 years later. Homeaway started in 2005. And then it was another 10 years after that. It was right around 2015 that all of a sudden vacation rentals became trendy, 20 years after VRBO started.

For as long as there has been the... internet, there has been the ability to rent short-term rentals online. But Airbnb did an amazing job of making the user experience for both hosts and guests easy, seamless, intuitive. They have a great user interface. And so Airbnb began to dominate the branding in the same way that Google dominated search, the way that Kleenex dominates, what's the word for it, nose tissues and the way that Xerox dominates photocopiers, Airbnb became synonymous with short-term rentals. And when that happened, all of a sudden, 20 years after people had the ability to be short-term rental hosts, all of a sudden there was this huge gold rush towards the world

of short-term rental investing. Now, to the question, why now, it is absolutely true that arguably you could state that due to this increased attention on short-term rentals brought about by Airbnb, demand increased. So arguably, there could be a very, very sound, reasonable explanation for the question of why now. Why now? Well, the popularity of Airbnb caused demand to increase. Therefore, 2015 is a better time than 1995. If you have taken the time to ask yourself the question, why now, and you have come up with that as the answer, I support you. But if you have not taken the time to ask yourself, why now, and you're interested in it in the year 2015, for no reason other than everybody's talking about it, everybody else is doing it, the internet is all a buzz

about it, that's not a great reason. And given that the popularity of Airbnb caused many city councils, many municipalities, to start passing laws restricting short-term rentals for the first time. These are cities and towns that had no laws or few laws restricting short-term rentals from 1995 through 2015 for that 20-year time span when people were doing it on other less popular websites. It was only when both demand and supply exploded, you know, which has really only happened in the past five to ten years, you know, that's when a lot of places started cracking down. And so arguably, the last five to ten years may, at least in some areas, have been the worst time. Now there's more competition and there's more regulation, whereas in the 90s or the

early 2000s, you didn't have to deal with those competitive forces. And so that, I'm not laying that out to make a case for one conclusion or the other. I'm not laying that out to make a case that It was better or worse in 2015 than as compared to 1995. All real estate is local. So whether it was better or worse in your particular location is going to be specific to the circumstances that impacted that location, how your city council behaved, how much competition there is, how much supply and demand there is in that area. I'm laying that out to illustrate the example that for all the literally hundreds, if not maybe close to a thousand, at least hundreds. We'll just underestimate and we'll say hundreds of questions that I have received about Airbnb over the year.

And I'm using that because nobody says short-term rental. They use the brand name. For the hundreds of questions that I've received about Airbnb's over the years, while over the years that I've been running for and anything, not a single person has ever asked me or has ever indicated that they've thought about why it is that they're suddenly interested in this income opportunity at this particular point in history. Not a single person has ever said, I don't think that the circumstances in 2005 would have been right, but I think that the circumstances in 2015 make it better, or vice versa. And that's an example.

I don't mean to belabor the short-term rental point, but the enthusiasm around it is an example of people piling into an investment because other people are piling into it. It's an example of an investment trend. And I watched the same thing happen with Turnkey investing, Turnkey Rentals, where for years, nobody asked me anything about it. And then all of a sudden, the questions around turnkey investing started pouring in. And surprise, surprise, that coincided with several major turnkey companies really ramping up their online marketing. That's when the question is. began pouring in. Again, we go back to salience. You start seeing more and more buzz about a particular investment opportunity and you start thinking, well, maybe this is what I should pursue.

Okay, so we've just discussed turnkey investing. Let's change topics. Let's talk about crowdsourced investing, which is different. Crowdsourced real estate investing. Why did that suddenly become popular? There was a change in the laws around crowdsourced real estate investing. It used to be the only accredited investors were allowed to go into crowdsource deals. That law changed. And all of a sudden, there was this massive proliferation of crowdsource real estate investing. So to the question of why now, I mean, that question could be easily answered. Why now is because the opportunity became available to non-accredited investors.

That's the why now for a lot of people. But does that necessarily make it a great option? Does that mean that you should tie up 20 grand into that type of investment as compared to some alternative? Maybe, maybe not. You would need to do a rigorous analysis in order to answer that question, but few people were doing that. The very fact that the laws changed such that non-accredited investors were able to access this type of investment meant that big companies that were platforms that facilitated these types of investments sprang up overnight. which then caught the attention of the internet, which then created buzz, made it trendy, and grabbed the attention of a lot of people.

Attention economy goes beyond how we direct our eyeballs. The attention economy influences our asset selection. Where the buzz on the internet goes, our wallets follow. And that means that oftentimes if an investment is popular enough to turn into a a meme, we're more likely to invest in it. And that's not how sound investment decision making is done. I know there are many people listening who are thinking, well, I have a short-term rental or I have a Robin Hood account. You know, is that okay? Yeah, absolutely. I had a short-term rental. I have a Robin Hood account. Of course it's okay. Of course. I have no objection to any of the,

or most of the types of investments that I'm discussing. It's not about the specificity of The example, it's not about the what. It's about the why. And it's about how to think about that. So the takeaways are learn about mental models, learn about cognitive biases, learn behavioral finance. We've produced a lot of episodes on this podcast about those topics. Listen to those episodes in our archives. Create an overall investor policy statement and overall guiding statement for yourself that maps at a broad 30,000 foot level,

how you want to direct your entire portfolio. And this is a guiding statement that should be informed by your age, your timeline to retirement or your timeline to the goal of the investment. Your risk capacity, your risk tolerance, all of those factors will influence this big overarching investing guiding statement that you have. And then in the context of this larger guiding statement, you can then make decisions about whether X or Y or Z is a sound investment. But stay away from Internet buzz.

And if you find yourself getting distracted by a shiny object, such as whatever is the latest hottest trend, whether that's an individual stock or a sector-specific bet or a certain type of asset class or a certain style of investing, whatever is trending. If you find yourself getting distracted by that, don't just ask yourself why. There are going to be plenty of answers out there for why.

Ask yourself, why now? What makes this particular type of asset part of the dominant paradigm? What makes this the most clickable type of asset right now? Why are people talking about it? Why now? And sometimes when you reflect on that question, you realize the answer is, at least in January 2021, the answer to many of those questions is because people have household economic uncertainty when it comes to their personal income and jobs, but they have the prospect of making big money

in virtually any asset class, ranging from stocks to real estate to crypto. And that is a dangerous combination of factors. And that's what we're living in right now. And that does not mean that we are in a bubble. That does not mean sell everything and go to a cash, I am not implying that in the least. I'm simply stating that we need to recognize what's happening in the world of investments in the context of what's happening in the world of jobs and employment. And we need to bring those two pieces together as we try to understand this combination of the market and the economy and why things are happening right now in the highly unusual way that they are. So that is the January 2021 market and economic outlook.

Outlook is maybe not the right word. I don't mean to be forecasting. Market and economic snapshot of the current moment. And I thought that that deserved half an hour or so of discussion. So I hope that that provided some insight. I hope that that was helpful. And I hope that those takeaways, the main action steps that I just outlined are clear. So here's what we'll do next. We're going to take a break for a word from our sponsors. Normally in our episodes, we take two sponsor break, sponsor ad breaks. In today's episode, we're breaking format. Today's episode, we're only going to take one break. It's going to be a little bit longer. We'll have three ad spots in this break instead of two. So we're going to take one slightly longer break for a word

from our sponsors, which allows us to, you know, supports the show, pays the team, allows us to stay on air. Thank you for listening. And then after that, we're going to come back from our break and we're going to talk about the so-called death of cities. This is a highly discussed topic in real estate and another topic that the news has been buzzing about quite a bit, the so-called death of cities, the so-called death of urban centers, highly paid professionals who are reportedly, fleeing from high cost of living areas. Is that happening? And if so, how long will it last?

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That's W-A-Y-F-F-A-R.com. Sale ends December. 7. Welcome back. In this second part of today's episode, we're going to talk about the so-called death of cities. Now, this is something that's received a lot of buzz for about a year, and it began when there was a mass exodus from high cost of living areas, including New York, San Jose, San Francisco, Los Angeles. When the pandemic began, many people decided to leave high cost of living areas and instead ride out the pandemic in a lower cost of living area where they could live in larger square footage, they could have a yard or be close to nature, and could enjoy a good deal of more space and outdoor recreation at a fraction of the cost of what they were

paying. And that coupled with the idea that many employers will be more responsive to remote working, having tested it by necessity over this past year and having largely seen that it works, the notion of location independence, which was once largely relegated to freelancers and self-employed people, online entrepreneurs and online solopreneurs, that is now becoming far more accessible to employed office workers as the culture shifts to embrace remote work and work from home. Furthermore, in addition to cost of living and square footage, some people worry that cities are simply more dangerous, seeing how quickly New York got infected in the spring of last year, in the spring of 2020, seeing how the density in New York made it the first major U.S. city that had rapid spread

of infections. That led a lot of people to question, to speculate whether or not it is even a prudent or safe idea to remain in cities in the future. So with all of that established, that formed the grounds of this internet buzz around the so-called death of cities. And so that leads to the question, is the internet buzz onto something, are cities dead? And if so, what does that mean for real estate? So to the question of our city's dead, the answer is, in a word, no. The death of cities has been predicted many times before, and it will.

be predicted many times again. Throughout history, people have left cities and commentators have wondered if they would ever return, and they always did. First, let's take a look at previous pandemics. It is natural that a pandemic can make a population scared of density, scared of getting into an elevator or riding a subway. And that concern makes people who have the means to do so flee to the countryside. We saw that during the Spanish flu of 1918. We saw that during the cholera outbreak in 19th century London. We saw that during the black plagues in the 1400s. And every time people have fled cities as a result of a pandemic, they have always come back. Urbanization has always increased. And throughout history, it isn't just pandemics that have led people to

temporarily exodus cities, wars, hurricanes, earthquakes, economic crashes, all of these have caused people to leave either a specific city or across a nation, cities in general, temporarily. And each time cities have returned and urbanization has flourished. Now, that doesn't necessarily mean that every city will survive every incident. Take a look at major industrial cities like Detroit and Pittsburgh, they, to this day, have not totally come back from the economic crises that they faced as a result of losing so much employment as a result of losing industry. You are starting to see a revitalization in both, particularly in Detroit. They've seen a lot of investment, a lot of renewal in the last 10 years. But it is absolutely the case that history

is littered with examples of cities, particularly mid-sized cities, that some of the which haven't made it, or some of which never fully recovered after some type of calamity. The concept of cities and the trend towards urbanization, however, that has persisted despite prediction after prediction that it would not. And that is because that tight clustering of workers, firms, customers, suppliers, universities, institutions, cultural centers, that creates what Tony Shea, the former CEO of Zappos, calls collisions. And when you have a city or an urban center where people are more likely to collide, where spontaneous conversations result in new ideas and innovation, what this drives what's known as

the agglomeration economy, in which those collisions drive innovation and drive higher rates of output and productivity per worker, to put it in starkly economic terms. humans are social creatures in ways that Zoom can never fully replicate, and as a result, urban centers continue to have enormous productivity advantages. There are those who will look to previous historic examples of migration away from urban centers, and they will say, yes, but the Internet did not exist at that time. Yes, but we did not have Zoom or social media at that time. We didn't have that during the cholera epidemic or during the black plague or the Spanish flu.

And heck, even acts of terrorism, even 9-11, we technically had the internet, but it was nowhere near as ubiquitous and as integrated into our lives as it is now. And so whereas in the past, those types of travesties that caused people to fear density could not have driven people away long term because the internet was not so ubiquitous, but aren't things. different now? That's what commentators will often say, aren't things different now as a result over the internet? Don't we have the ability to leave but remain connected in ways that weren't possible even as recently as 2001? Now, that is a valid question and it is one that a lot of research has been done around. And what most economists have found is that the ubiquity of the internet has not had any adverse effect on urbanization and the trend towards density. In fact, in the years from 2005 to 2017, innovation-related industries and jobs became

more concentrated in urban centers rather than less. Now think about that. In the 12-year time span, when the internet was truly becoming a major part of our lives, 2005 was a year when you still needed a .edu email address to get a Facebook account. 2005 was the beginning of social media. And in the decade that followed, everything changed. That 12 years from 2005 to 2017, that's when we all got smartphones for the first time. That's when we all learned what apps were for the first time. If there were ever a time for those trends to begin, it would have been that decade plus.

But instead, the opposite happened. Instead, it was precisely during this time. period, when the internet became more integrated with our lives, that we continued the trend of clustering into the leading metro areas on the east and west coasts. And this is not just in the United States. This has happened worldwide. In Asia, density in cities like Singapore, Seoul, Hong Kong, Tokyo, New Delhi, Mumbai. In South America, the populations of Sao Paulo, Lima, Bogota, Buenos Aires. These are places that have grown in the last 20 years, not shrank,

even though the ability to leave these urban centers and live in a remote countryside location has been more accessible, particularly to knowledge workers, than ever in history. And that is due to the simple fact that Zoom, as we have all learned the hard way over this past year, Zoom can never replace IRL collisions and interactions.

Even fears about susceptibility to disease and to pandemics, it was easy to attribute New York's density to its rapid spread of the virus in March of 2020. But as we are learning, in hindsight, that explanation was overly simplistic. Because we've seen hyper-dense Asian cities like Singapore, Seoul, Tokyo, Hong Kong, those cities succeeded in managing the initial flare-up and did not have the same type of infection rate as a city like New York, largely because those cities had experienced managing SARS and MERS, other coronaviruses. And so it is not urban density, but household density

that seems to have made a much larger impact on infection rates, not the number of people who live per square mile. in your city, but rather the number of people who live per square foot in your own home. Now, much has been made in the media about New York City being, quote, a ghost town. The numbers, however, tell a different story. The population of New York has declined by 5%, meaning the other 95% have remained. The 5% that have left are the 5% with the means to do so. And so while rents in Manhattan have declined, rents and purchase prices in Brooklyn, Queens,

and the Bronx have risen. Now, what does this mean for you? What does this mean for, particularly if you're a real estate investor, what does it mean for the future of real estate? And I am specifically talking about residential real estate, which is the area in which I operate. Commercial real estate is a completely different conversation, and that is not my area of expertise. But what does it mean for those of you who are interested in residential real estate,

either for the purpose of your own primary residence or for the purpose of residential investing? First, the pull-toward cities does not just apply to major cities or mega-cities, like in the United States, that would be like New York or San Francisco. The pull-toward cities is a pull-towards urban clusters anywhere, including the largest city or cities, in whatever state it is that you live in and or you want to invest in. Austin, Miami, Seattle, Las Vegas, Denver, these are some of the fastest growing cities in the United States. The South and the West in particular are seeing major growth, according to the Census Bureau in the years between 2010 to 2019. 13 of the 15 fastest growing U.S. cities were all located in the South or the West.

What this presents is an opportunity for one of two things, either to look at the surrounding areas, the outskirts of these cities, to see if there are good investment opportunities there. Around fast-growing Atlanta, for example, there's Douglasville, Austell, south of the airport, OTP South DeKalb County. These are all areas within one hour of a growing city that have good investment properties and that are close enough to the state. growing population center that it feeds off of that growth. Outside of Seattle, Port Angeles, one hour away. I haven't checked the prices there in a few years, but I know as recently as about three years ago when everybody was complaining about how there was nothing good in Seattle, one hour away in Port Angeles, there were properties that were meeting the 1% rule. That was around 2017. And so these areas in close proximities to cities, areas within a one hour drive

of city centers, these present a lot of good opportunities, or, Many of them do. Not every city is individual, every city is different, but many cities have areas that are within a one-hour drive that offer good opportunities. And given that the trend towards urbanization is not going away, given that there is not likely to be a mass exodus to remote rural locations, the areas that surround major cities continue to be places that are by and large filled with opportunities. People may talk or handering about the death of cities, the decline of urbanization, but no one reasonably expects that across the nation, our small towns of 5,000 people will suddenly explode into population centers with 20,000. Sure, home prices in less densely populated areas have been on an uptick, but we haven't seen new construction starts. We haven't seen road development, infrastructure development.

we haven't seen new construction permits or renovation permits to an extent that indicates a permanent exodus. And to that extent, you can continue to look at areas that surround major cities, areas within a one-hour drive of major cities, as stable locations where growth is likely to spread for the purpose of real estate investing. So that's one approach. Another approach is that if you are looking at a city and you're looking at it within a one-hour radius and you still can't find anything, the thing to do is to cross-reference a list of some of the fastest-growing cities with a list of the cities that have very landlord-friendly or investor-friendly price-to-rent ratios. So, for example, Columbus, Ohio, Tulsa, Oklahoma, Buffalo, New York, Tucson, Arizona, Louisville, Kentucky, Cincinnati. These are areas with very investor-friendly priced rent ratios where the population is either stable or growing, typically not necessarily runaway growth, but steady, enough such that the population is replacing itself, but not so much that it's being flooded by speculative new construction. The stability of these mid-sized cities provides a great opportunity for investors, particularly long-term buy-and-hold investors,

in residential real estate. Now, will there be small towns, small rural areas that provide good opportunities, perhaps some? Northwest Arkansas, for example, is seeing a shift from urban to rural. Fayetteville, Arkansas, population is growing. Northwest Arkansas has the highest population growth in the state, largely in rural areas. It was drawn by people who can work remotely and who want to enjoy. The beauty and the outdoors of that area that part of the country is gorgeous. And so do those opportunities exist?

Yes, they do in specific places, but that does not indicate an overall decline in the overall trend towards urbanization. Northwest Arkansas, for example, has a relatively small enough population that it does not take a major influx of people to drive the population up by an additional 3% or 5%. It is not necessary to have a huge decline in the population around Miami in order to have the people to fuel the population of Fayetteville. Both places can grow simultaneously. And so yes, opportunities do exist in some, and I'm going to emphasize some non-urban areas, but to the extent that we do see those opportunities as investors, that should not be read as, a hit or a negative indicator on the trend of urbanization as a whole. So those are some thoughts on the death of cities. By the way, all of the research that I pulled for what I've just discussed

will be in the show notes and the show notes are available on the website at affordanything.com slash episode 296. Thank you for tuning in to today's episode. As I mentioned, we broke format today in order to discuss some of the questions and current trends in the world of both stock investing and real estate. We will resume our normal format next week with our Ask Paula and Joe episodes. Joe Sal C-Hi, former financial advisor, joins me to answer questions that come from you, the community. We are also in the middle of our 31-day challenge, and you still have time to sign up.

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