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No. of Recommendations: 13
Gee, so many things to comment on and so little desire to spend the time to do it in a coherent way -- so here are some random thoughts.

-- what does one man's opinion (WEB) have to do with the pricing of anything, and I'm sure he would be the first to admit that he could be way off? I believe WEB's point was that the stock market is overvalued so that it will underperform it's historic returns over the next 10 years. What does this have to do with real estate? Can't stocks simply go down to bring things back in line without real estate going up? Can't real estate be fairly priced while stocks are over-priced so that only one asset class would need to adjust?

-- there seems to be a contradiction in your thesis. Since you believe in the efficient market thesis, that money is free to flow among all investments, that people act in a rational way, and that all information is priced into the markets, then all asset classes should already be priced to offer equivalent risk adjusted returns right now. So what would be the point of moving money from one asset class to another except that one decides he wants to take more or less risk. Shouldn't real estate already be priced to provide equivalent returns with the stock market according to your thesis?

-- even if stocks return 7 percent over the next 10 years, the businesses that make up the stock market may earn 11 percent annual returns on equity. Why would you use the 7 percent figure to deduce real estate prices and not the 11 percent figure which is actually the returns that businesses as an asset class are producing on invested capital?

-- you talk a lot about perceptions. Who knows, except in hindsight, what the popular perception is. Perceptions have nothing to do with reality. In the 1970s, real estate and gold way outperformed stocks. I would assume that in 1970 the perception was that each market was fairly valued, and according to the efficient market theory they were. But reality was totally different. Why would this decade be any different. Who knows what real estate will do over a 10 year period, and using a prediction about stocks to predict real estate returns just adds one more wild guess to an already wild guess.

-- this idea that capital is allocated efficiently is a myth. I think the NASDAQ, NIKEI, Gold and Japanese real estate bubbles show this. Very few people know what they are doing when making investment decisions. Why would anyone buy 30 year bonds at 5.5% if the stock market always beats this over any 30 year period by quite a bit. Money may be theoretically free to flow to the highest return, but in reality it does not. Banks loan money. They don't switch asset classes every time they perceive one might outperform the other. Did banks shift to buying stock with their capital in the early 90s or did they continue to make loans? Most insurance companies buy bonds and are not switching into real estate, gold or stocks every few months based on their perceptions of getting the highest return. My mother buys CDs and never stocks and has her whole life. She doesn't scour the different asset classes looking for the highest return. The owner of an office building doesn't sell his property because he sees the stock market outperforming real estate over the next 6 months. Some capital is seeking the highest return over the next week, some the next 3 months, some over the next 3 years and some over 30 years. Their allocations of capital may be totally at odds with each other depending on their goals. Even if each individual or institution is trying to act rationally, it doesn't mean that the whole is rational.

-- I find economic theory interesting as well, but economic theory predicts full employment, no recessions and everything in equlibrium. Each part of classical economic theory may make sense, but the sum of the parts fails to describe the whole. Economists are no better at predicting the future than anyone else, and half the economists disagree with the other half. The best economic theory to believe in when making longer term investment decisions is "reversion to the mean".

-- I agreed with your basic thesis in my post. I said the long run return on commercial real estate is about the same as stocks, but over any given decade it can be very different (the 1970s for example). Nobody really believes in the efficient market hypothesis, even you Jim who is overweighted in real estate. Some people believe in it theoretically, but nobody believes it in their gut.

-- Jim, I thought that one thing we agreed upon is the over-importance placed on the flow of funds; that everytime some asset is sold, it is bought at the same time at the same price by someone else. How does it work that money flows out of the stock market and into real estate?

-- Wouldn't you agree that real estate demand, the cost of materials and labor, economic strength, and inflation are going to be far more important in affecting real estate prices than what happens in the stock market?

Things were slow today at work, so I was able to show that I can be as verbose as you. Clearly we have too much time on our hands. Feel free not to respond if you choose, as this discussion is likely to go in circles.
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