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.Her house had a larger lot and a view, but still, it was worth less than half a million.Theperceived value of her home had gone from $1.3 million to lessthan half a million in just three short years.Home prices in herneighborhood had plunged by 60 percent.Right at the peak in 1989 one home on my friend s block soldfor $1 million.Now, this home was almost considered a teardown.I saw it; it had peeling paint, a dead lawn, and had never beenremodeled since it was built in the early 1950s.The new ownerhad put 20 percent down ($200,000) and still owed $800,000.Unfortunately for him, the prices for housing dropped dramaticallyand quickly.Eventually the value of that house bottomed out at$400,000.That meant he was upside down by $400,000, twice hisinitial equity.To top it off, the Fed funds rate had plunged from nearly 10percent when he bought the house in 1989, to just 3 percent by1993, but the bank wouldn t refinance an $800,000 loan on ahouse that appraised at only $400,000.So, after putting $200,000down, this poor guy was stuck with an $800,000 mortgage, at aninterest rate of around 12 percent, and even though mortgagerates had fallen to 6 percent or less, he was unable to refinance.He was underwater for ten years until his home finally exceededthe 1989 purchase price in 1999.Anyone who bought income property during the early 1990s,however, could easily get property that cash-flowed well, and soonafter, real estate values appreciated more than anytime in thepast.All that fiddling the Fed did with reserve requirements andinterest rates back in 1991 and 1992 finally kicked in with avengeance in 1995.In 1995 the currency supply exploded andnever looked back.In the decade from 1995 to 2005 the currency supply increased about 120 percent.That means that in those tenshort years, more currency was created than in all the precedingeighty-three years.In fact, more currency was created than theentire previous history of the United States, and it resulted in thebiggest real estate boom in history, as well as a whole bunch ofbubbles in bonds, derivatives, consumption, debt, and once again,stocks.Dot-BombBut the bubble of all bubbles with maybe the exception of therecent real estate bubble was the tech bubble of the late 1990s.I m not going to present a lot of facts, because I m sure youremember the story.It s a story that starts slowly with honest companies that cameout with good products at the right time.Their quick rise and hugeprofits attracted other companies to jump on board the tech train.As that train accelerated, the masses lost their collective mind andthrew money at companies of no substance.So basically, anyonewith an idea could get together, incorporate, go public, buyFerraris, install a golf course in their backyard with the proceeds,and issue stock like toilet paper.Finally, in order to prevent a market meltdown from the Y2Kbug, the Fed, with Alan Greenspan at the helm, pumped so muchliquidity into the markets that they started to rise at an amazingpace.The frenzied speculation sucked in so much capital that iteventually became a pyramid scheme, requiring an everincreasing mountain of currency to maintain its upward trajectory.Essentially, the dot-coms turned into dot-bombs.The financial fallout included the popping of the dot-bubble, the collapse ofcompanies such as Enron, WorldCom, and Global Crossing.Many investors lost their retirement funds, houses, and savings.So, as you might have guessed by now, the lesson here is: Ifyou jump into a market when everyone else is doing the samething, you re probably too late.On the other hand, if you get into amarket early, when it s fundamentally undervalued, then wait for itto become extremely overvalued, and sell once a true top hasbeen established, you should do very well.In the case of the Nasdaq, there were fourteen years where youcould have bought your tech stocks while the index was under1,000, and you had about a year to sell stocks over 3,500.If youtimed it really well and were able to sell your tech stocks at 4,000or 4,500, good for you.Unfortunately, that s when most peoplebegan buying, not selling.In the end, the bubble burst and liveswere ruined.It requires a lot of education and investigation to find anundervalued asset class at the beginning of a new bull market.Those opportunities only go to the very few who do the workrequired, and those that are able to think for themselves.Mostinvestors get their advice from the same place as everyone else.They do things the easy way and wait for advice to come to themfrom the TV, the big investment firms, and their friends andneighbors who are already getting rich.on paper at least.During the dot-com rush, most investors who bought into themass media advice also bought into the pitch.They believed in the new paradigm, and the sentiment that tech will go up forever. They also bought their tech stocks after the Nasdaq passed 3,000and held on, hoping for a turnaround as the index sank all the waypast 2,000. But remember, in times of financial upheaval, wealth is notdestroyed, it is merely transferred.The opportunities this createsfor the educated investor are enormous.The pain and sufferingthat was the popping of the Nasdaq bubble could have not onlybeen avoided, but also capitalized on, by investors with the guts tochange course when things didn t seem quite right (like when theNasdaq went vertical in late 1999).I m talking about investors thatare educated enough to discern the difference between price andvalue.The price means nothing.value is everything. Part 2Today Chapter 7What s the Value?Since the end of the Bretton Woods system in the 1970s, thedollar has been a dirty, double-dealing, back-stabbing liar, and itstill is today.As I write this chapter, the Dow is at 13,000 and is trying topush north toward its highs of just over 14,000.It also appears thatwe have just witnessed the end of the greatest real estate bubbleof all time.The price of my friend s house in Los Angeles is on thedecline again, and other home prices in her neighborhood havealready fallen by 15 percent.While you re reading this, the Dow could be blasting up past15,000 or 20,000, and you re thinking, 14,000? Man, that was along time ago. Or, it could be less than 10,000 and you rethinking, 14,000? Boy, those were the good old days
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