Ignore Economists For Smarter Investing

These are some of the predictions economists made about the real estate market in 2020:
“House prices could tumble by a third if coronavirus leads to a prolonged downturn.”

“Housing market could still see major recession to come as coronavirus ravages economy.”

“The Fannie Mae forecast predicts that existing home prices will fall in the third quarter of the year. They’ll keep falling through Q1 2021.”

“Freddie Mac’s experts expect home prices to drop, too, falling 0.1% in the third and fourth quarters of this year, and then again in Q1 next year.”

Were any of the doomsday prognosticators right? No, not even close.

According to a new Zillow analysis, U.S. housing gained about $2.5 trillion in value in 2020 — the most in a single year since 2005. Strong demand drove intense competition among buyers, causing homes to fly off the market at the fastest pace Zillow has recorded, with prices still pushing higher.

As the old saying by George Bernard Shaw goes:

“Those who can, do; those who can’t, teach.”

The implication is that those who can do something well can do that thing for a living, while people who cannot do anything that well will make a living by teaching. When it comes to economists, the saying could go something like this:

“Those who can, do; those who can’t, PREDICT.”

If economists were so good at predicting, why aren’t they rich and retired already? That’s because they’re not very good at predicting how the economy will move – least of all the real estate sector.

Ask yourself this:  If economists are so good at what they do, why were nearly all of them caught off guard by the mortgage-backed securities debacle that set off the Great Financial Crisis in 2008?

It was so under the radar that one group of investors – of the Big Short fame – were able to make billions betting against the housing market because nobody suspected a crash – least of all economists.

“Treat economists like any religious minority. Grant them the right to say whatever they believe and the right to gather. But always be skeptical of the stories they tell.” –Tomas Sedlacek, Czech Economist.

Even when economists are telling you not to trust their profession, you should heed their advice.

In his classic 1989 book One Up On Wall Street, former Fidelity Fund Manager Peter Lynch had this to say about economists:

“There are 60,000 economists in the U.S., many of them employed full-time trying to forecast recessions and interest rates. If they could do it successfully twice in a row, they’d all be millionaires by now. They’d have retired to Bimini where they could drink rum and fish for marlin.”

Lynch continued.

“But as far as I know, most of them are still gainfully employed, which ought to tell us something.”

In a 2013 article for The Atlantic, economist Noah Smith had the following to say when talking about economists:

“Essentially, they make models, which are mathematical tools that are supposed to describe how the economy functions. The problem is that economists haven’t built a model of the whole economy that works. Many smart people have spent a lot of time creating tools with names like ‘dynamic stochastic general equilibrium.’ But as of this moment, those models can’t forecast the economy like our meteorologists can forecast the weather. Furthermore, they contain a lot of obviously wrong assumptions.”

According to Noah Smith, economists can’t forecast the economy like meteorologists can forecast the weather, and frankly, meteorologists are frequently wrong – making economists even less trustworthy than weather folks.

What is the job of most economists? To give their opinions on behalf of their employers – whether that be a bank, university, industry group, or government agency.

The fact that they are still employed should tell you everything you need to know about whether they’re good at their jobs. If any economist successfully predicted price movements, they’d be rich, and everyone would wait with bated breath on their every word. Still, the fact is, I could not name one economist that fits that description.

Those who can do and those who can are those who have gotten rich in real estate or, any other industry, for that matter. Show me the money, and I’ll show you who to follow for making smart investing decisions. It’s not the economists.

The rich frequently ignore economists when making investment choices. Why? It’s because the rich see beyond the latest sound bite or clickbait economists are constantly fueling. They get paid to be heard and quoted. Their predictions are typically for the short-term.

Savvy investors don’t think short-term. They have investment windows of at least five years and beyond, so they’re able to ignore the noise of economists who are often wrong. With long investment windows, the rich know that there may be temporary dips and valleys here and there, but in the long run, everything evens out.

This is especially true with real assets and other productive tangible assets. The public will always need tangible assets – whether it be housing, food, and commodities.  And as the population grows, the need for these goods will only grow. They may dip here and there, but demand growth has been historically reliable and consistent.

Do you want to make smart investing decisions? Mirror the doers like successful investors and not the talkers like economists.


IMG_3070 copy
Logan Freeman

Building generational wealth with alternative investments