Can a book go out of date?
I would certainly think there are examples.
Surely an old medical textbook could be out of date due to advances in the medical world that take place each and every day.
But what a work of fiction? How about something like, say, George Orwell’s 1984?
Published in 1949, the story took place in an imagined, dystopian future, presumably the year 1984 since that’s the name of the book. And while this wasn’t intended to represent a forecast or prediction on behalf of the author, I might cynically suggest that the book is out-of-date.
I might also add that genres of film, television, and literature could go out of date, as could certain types of humour. When I watch Wayne’s World nowadays, I often ask myself, “What was it about this movie that had me laughing hysterically in the early-1990’s?”
But what about a book on investing?
Does Benjamin Graham’s classic, The Intelligent Investor, still carry water in 2024? This book was published, ironically, in the same year as 1984. But because it’s advice on investing, is it dated? Is it out of date?
Times change. Markets change. But do the underlying fundamentals of stock market investing change? Do the underlying fundamentals of individual stocks change too?
I told this story on TRB years ago as part of another blog post, but when I was about 19-years-old and working out at the Dunfield Club on Eglinton Avenue East, I met an older gym-rat named “Bike Mike” who schooled me not only on bodybuilding but also in business.
He was probably in his late-30’s but that was “old” to me, and when he gave me a list of books to read, I couldn’t believe the date of publication of some of these.
Bear in mind, this was before Amazon.ca. In fact, it was before the internet went mainstream. So I had to call book stores and ask if they had these books in stock, then drive down and buy them in person.
He recommended “Reminiscences of a Stock Operator,” which was published in 1923, as well as the aforementioned “Intelligent Investor.” He had me read Peter Lynch’s “One Up On Wall Street” from the early 1990’s as well as Jack Schwager’s “Market Wizards.”
I also still own a thick hardcover version of John J. Murphy’s, “Technical Analysis Of The Financial Markets,” as well as Martin J. Pring’s “Technical Analysis Explained” from 1985, although this version came with a CD-ROM disc which I thought was so cool!
One book that didn’t really fit with the others, which were mainly books about the stock market, was Robert G. Allan’s “Creating Wealth.”
This book was published in 1983 and I read it somewhere around the year 2000 and then maybe again in 2002.
There was one thing I took away from this book, which, unfortunately, I never put into action:
Buy one house per year for the rest of your life.
Easier said than done, right?
I remember meeting “the guys” one night in university and chatting about what we were up to. I mentioned that I’d just finished this great book on creating wealth and that as soon as I was finished school, I was going to buy one house per year for the rest of my life.
The laughter was eardrum-bursting.
And it went on all night.
The next day at the gym, I was getting, “Hey Dave, buy any houses this morning?” And this actually went on several years after school was finished. The fact that I chose real estate as a career was a complete coincidence.
Over the last twenty years, I’ve remembered parts of Creating Wealth but I haven’t sat down to read it again.
Last weekend, I decided to take out my copy, which didn’t contain any underlines or highlights, since I was way too anal to “ruin” a book back in the day (probably still would be…), but I thumbed through selected chapters and came to the following conclusion:
Investing advice can go out-of-date, or worse, be completely impossible to implement decades later.
Today, I want to share with you some excerpts from this book, just to see how times have changed in forty-one years.
We’ll start with something that Mr. Allen mentions early in the book
Let’s assume that in many areas of the country well-selected properties appreciate 10 percent per year on average – although there will be years when 10 percent per year seems extremely high and other years when 10 percent seems very low.
This is fascinating to me because I’m reading it after having worked in the real estate industry for twenty years.
I don’t recall another financial guru being this bullish on long-term real estate, and there aren’t many “stable” investments that one would expect to yield 10% per year.
But where Mr. Allen loses me is in Chapter 6, which begins with the following:
It has never been easier to make a fortune in real estate.
I can’t profess to know the extent of which this was true in 1983, but once I see how Mr. Allen suggests we invest in real estate, I start to realize that this isn’t feasible in Toronto in 2024.
There is a very narrow range of properties that are worthy of the term investment grade. I call this my target property. In my opinion, at this time an ideal target property should have the following description: a three-bedroom single-family detached house or condominium that is located in a stable neighbourhood within a fifty-mile radius of your own home…
So far, so good. Right?
I agree that three-bedroom houses are great investments, and sure, why not live within 50 miles from the house in which you’re investing?
But this excerpt continues:
…priced at less than the median price in your city and worth at least 10 percent less than your cost; and can be bought with less than 10 percent down and terms that allow the buyer to rent out the home with little or no negative cash flow.
Oh.
IS THAT ALL?
Well, this is great advice, isn’t it?
Perhaps this was possible in selected cities in the United States in 1983, but can you imagine this today?
First of all, Mr. Allen suggests that a detached three-bedroom family home should be “less than the median price in your city,” but I find this hard to fathom. Detached homes are the most expensive type of real estate, so it’s not reasonable to assume you can find them for below average or median.
Secondly, Mr. Allen merely assumes you can secure houses for 10% below market value. If the old adage, “A house is worth what somebody is willing to pay for it,” then his suggestion is an oxymoron. Perhaps it was common in other markets, at other times, to routinely find properties 10% below market value, but not in our market today.
Lastly, Mr. Allen suggests that the house be “bought with less than 10 percent down.” Well, unfortunately, the CMHC mandates that any property purchased in Canada at a price of $1,000,000 or more requires a minimum 20% down payment. So what may have worked in 1983 doesn’t work in 2024. At all.
Now, in terms of “renting the home with little or no negative cash flow,” here’s where things go completely off the rails. At least, in Toronto, in 2024.
The average detached home in the 416 in May of 2024 sold for $1,826,370.
While these numbers could vary wildly depending on the neighbourhood, let’s say that there’s a detached, 3-bed, 3-bath house on a 20 x 120 foot lot in the Beaches, worth about $1,826,370.
What would that same house lease for today?
Let’s say $4,700.
But assuming a 20% down payment on a purchase of $1,826,370 (I know that Creating Wealth suggests a 10% down payment, but that’s not permitted under CMHC guidelines), and assuming a current interest rate of 5.29% on a five-year fixed, the monthly payment is $8,740.61.
The taxes on a house like this are likely going to be $6,000 per year or more, but let’s say it’s $500/month.
I would factor in another $100 per month for home insurance, and whether the tenant pays the utilities or not remains to be seen, but for electricity, gas, water, and waste, you could be looking at another $400 per month.
All told, this property would be cash flow negative by over $5,000 per month.
Play around with the numbers if you’d like, but even if this house rented for $5,000 per month, and even if the tenants paid all the utilities, you’re still going to experience a massive negative cash flow.
So just imagine how much worse it would be with a 10% down payment?
This “advice” in Creating Wealth holds absolutely no value in Toronto in 2024.
And the crazy part is: mortgage rates were 13% in 1983!
Where in the world was Mr. Allen suggesting we find these investments?
I’m sure they existed in 1983, otherwise this book wouldn’t have been written and it wouldn’t have been a best seller. But today, this advice simply seems out of date.
Here’s another interesting line later on in the book:
Your rule is never to invest more than 10 percent in a property unless you can buy it at least 20 percent below market value.
Wow.
Didn’t we just read in the previous section that you should be looking for properties 10% below market value?
Now it’s twenty percent?
Again, the world was a different place in 1983. So was the real estate market.
But imagine trying to buy a $1,000,000 house in Toronto, today, for under $800,000. I know that some of you would like to share examples of houses that have declined in value, but we’re not talking about former market value, we’re talking about current market value.
The reality is, the Toronto market is simply too efficient for this to ever happen.
Think of those advertisements, whether on the ratio, online, or for seminars, telling people to “…buy distressed properties at auction.” That doesn’t happen in Toronto. A “distressed property” like the one I sold in Brampton back in March ended up receiving twenty-one offers!
So let’s look at another section, and this one really shows how long ago 1983 was in comparison to today:
Suppose you get wind of a property for sale through a local finance company. It is a small three-bedroom house appraised at $150,000 and located in an outlying town where you would not normally invest. The finance company has repossessed the property from the original owner because he failed to keep up the payments on his $25,000 second mortgage. The company has assumed the seller’s first mortgage of $100,000 and begun to make payments while trying to sell the property to recoup its losses. The company doesn’t want the property. It is in the lending business, not the real estate management business. In fact, its operating regulations specifically prohibited holding more than a small percentage of its net worth in illiquid assets such as single-family houses. In talking with one of the company’s executives, you learn that it is also company policy not to profit from its repossessions, only to recoup lost interest and legal fees. The bank offers to sell you the property for $130,000 if you can come up with the $30,000 necessary to pay it off.
All that’s left out from here is the mention of a fax machine.
“Suppose you get wind of a property for sale through a local finance company.”
Sure, in 1983. But in 2024 we have the MLS system and every property being sold usually hits the open market.
Even if a property was available off market, the paragraph above is essentially talking about some sort of “insider information,” as is evidenced by the comment, “In talking with one of the company’s executives, you learn that…”
I don’t know that it’s prudent to put an investing action plan into place that relies on insider information, nor is it reasonable.
As for the actual investment itself, this also wouldn’t be viable today.
For one thing, this mentions a finance company that “doesn’t profit from repossessions,” which might exist today, but doesn’t automatically mean that the profit is given to the buyer/opportunist and not the foreclosed owner.
But it also assumes that a lender is having trouble selling a property for fair market value and would accept a 13.3% discount on the value.
So many of the investments and assumptions in this book rely on buying properties below fair market value, and while that is possible in some locations, for some property types, in some cities across the country, it’s exceptionally rare in major Canadian cities in 2024.
In a section about Buying Discounted Mortgages, we see this:
The goal is to find deeply discounted mortgages secured by excellent property in excellent locations. How do you find these “motivated mortgage holders” who want less cash now rather than more cash later?
There are five major sources of these kinds of loans:
1. The newspaper
2. Mortgage brokers
3. Realtors and exchanges
4. Referrals
5. The county courthouse
Again, I can’t help but think about the fax machine.
Yes, times have changed, and we don’t go to “the newspaper” anymore to search for real estate deals, but in fairness, Creating Wealth was published about two decades before the Internet became mainstream.
But I also think that the way mortgages are bought, sold, and as we learned in 2008, packaged, has changed significantly.
The examples used in the book always seem to focus on extremely desperate individuals with no other options, and/or describe circumstances that are far too easy.
Here’s an example:
Assume that you received a call from a mortgage holder of a $20,000 mortgage. If the note holder is willing to sell it for $15,000, my calculator tells me that this note yields 13.14 percent. I tell the note holder that I’d like to check it out. Since I have no cash, I call up an investor friend of mine who likes to invest in mortgages but doesn’t like the hassle of finding them. He is more than happy to let me do the shopping and take some of the profit. His bottom line is a 12 percent yield on his invested dollar. My calculator tells me that our sample note would have to sell for $15,925 in order to yield 12 percent.
But I can buy it for $15,000!
I tell my friend to give me $15,925, and I will get him the note he wants. He gives me cash, and I buy the note for $15,000 and pocket the $925 as my profit. How much of my own cash did I invest in this note?
None!
See what I mean?
Maybe this worked in 1983, in theory, or in practice.
But what “mortgage holder” is looking to sell a $20,000 mortgage for $15,000? I know, I know, there’s always an example somewhere. Maybe it’s a house that’s declined in value, and where the owners are behind on their payments, and maybe they breed snakes there too.
In 2024, these types of “deals” don’t exist.
And the part about calling up the “investor friend” who doesn’t like the “hassle of finding deals” sounds a lot like today’s radio ads describing “broken, used, and unwanted gold.”
Other sections of the book talk about flipping properties – often on paper, as though land transfer tax, real estate fees, legal fees, and capital gains don’t apply.
Then we have sections of the book that talk about vendor take-back mortgages as though they’re automatic, which was the case in 1983, but most certainly is not in 2024.
The chapter on investing in silver dollars was interesting, as was the notion of investing in stamps.
Rare coins are also a fantastic investment vehicle described in the book, and toward the end, this advice is given:
If you have only $1,000 to your name, your best bet is to start with real estate. But once you have an established portfolio of real estate, as in the third stage of wealth, it would be wise to diversify some of your assets into gem-quality rare coins.
A perfect portfolio distribution would be as follows:
20 percent gem-quality type coins
20 percent gem-quality rare gold
20 percent quality twentieth-century singles
20 percent quality silver dollars
20 percent gem-quality silver commemorativesFor your best strategy, stick with the right coin in the right gem grade.
I’m currently looking for volunteers to research, analyze, and present the findings here on TRB as to how these coins have appreciated since 1983 and what the market is like for them today.
In one of the last chapters in the book, Creating Wealth describes properties with FOUR mortgages on them.
Four mortgages.
How common is that in Toronto in 2024?
So is this real estate investing advice out of date?
That was meant to be rhetorical, but somewhere, one of you is going to tell me about a property with four mortgages that’s a great investment opportunity, and why that somehow validates an entire book on personal finance that encourages individuals to seek out four-mortgage-homes!
I had fun with this exercise.
It made me feel a little old, since I actually remember parts of this book from when I read it over twenty years ago, but it’s interesting to see how investment vehicles have changed since 1983, as well as the investment options people have, and the process therein.
Then again, perhaps our grandparents could tell us what it was like to hold physical share certificates?
Have a great weekend, everybody!
