My formula for success is rise early, work late, and strike oil. – J. Paul Getty
You may remember a few market bubbles that happened in the first decade of the twenty-first century – the tail end of the dot com bubble, leading into a housing bubble and the eventual implosion of financial markets.
For a short time anyway.
Around that time – well, around any time, people look to buy houses.
Whether markets are up or they’re down, we need a place to live.
The Economist at the time had a piece on house prices, examining the economics behind the house buying experience.
If you listen to most people they’ll tell you that property is a safe bet in the long term, “safe as houses”, as the saying goes.
You can never lose with property.
But, of course, you can.
All you have to do is download a chart of historical house prices and look at what happens – some years they go up and some years they go down.
Your return depends on when you get in and when you get out.
And once you get on the house price ride you actually stay in the same place for much of the time because, as your house price rises, everyone else’s does as well.
You stay relatively just as rich or poor as you were when you started – although you may bob closer to or further away from the poor house deprived people standing on the banks watching you ride the price waves.
Anyway, the Economist piece ended with some sage advice about when you should buy a house.
You should buy, they said, when the cost of buying is less than the cost of renting. Or, they went on, if you really want to buy that house.
Now, that is a spectacular piece of reasoning, something that has always stuck with me.
Something that I’m expressing through the formula above.
In case you aren’t familiar with ternary operators – that’s what the first part of the formula shows.
That’s the bit in brackets.
A ternary operator takes two arguments, a and b and evaluates to true or false based on a condition.
So, if “a” is the cost of renting a house and “b” is the cost of buying an equivalent house and a is greater than b, then the formula evaluates to true and you should buy the house.
If it’s the other way around, you should pass.
Now, you can see the implications of this simple observation in many other walks of life.
If you had a choice between being a doctor or an artist, pick the option that gives you more income.
If you have a choice between one girl and the next, pick the one with the nicer mother.
And so on…
If you have a number of criteria, add them up, consider the pros and cons and in Ben Franklin style go with the one that has the longer list of pros.
This first part of the formula is what everyone focuses on – what your parents want for you, what your teachers tell you to consider and what society at large thinks is the right way to operate.
And it leads to some catastrophic blunders.
For example, when you assume that the price of a house will increase forever – and you will always make more money buying than renting – then you will buy at any price.
That’s what creates bubbles.
It’s the greater fool theory – there will always be someone else who comes along and is willing to pay more than you did.
There will always be an “a” to pick up the consequences of your “b”.
And that’s why people end up being miserable at their career as a lawyer.
Or finding that perfect partner who looked like they ticked every box on a very long list ends up wasting a decade of your life.
The balancing part of the formula, then, is on the other side of the two vertical lines – the “or” operator.
The “or” operator moderates the conversation – it says it’s ok to be happy.
And if it’s going to make you happier being an artist than a doctor then it’s ok to have a go at that.
If there is a house that you really want, then you can break the economic rules to get it.
And sometimes, you have to go with the partner you want, regardless of what your parents or society says.
Of course, it would be nice if you could have both – something that has an economically valid basis and makes you happy.
If everything worked out well whatever you did.
But that might be too much to ask.
In the meantime, make a decision with your head or your heart.
Whichever one makes more sense to you at the time.