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  I’m putting on my armchair economist’s hat today.   I’m still amazed that people would get excited enough to buy stocks just because the Federal Reserve announces a rate cut but it happens more times than nought.   You would think that a savvy investor would buy a particular stock based off of expected growth of the asset or the strength of the company’s financial statements.  What happens when you toss the homework aspect of a purchase aside?  

I think the Wall Street adage is, “Bulls make money, Bears make money, Pigs get slaughtered.”

In my opinion there are only three actions a smart trader would take:  

1. Absolutely nothing.  No reason to buy or sell right then.  Plenty of reasons to wait for the volatility to decrease.  Double check your facts and assumptions based off the new information and revisit the stock later.
2. Short term day trade.  Very Very Short term.  A little risky but to some a drastic, yet predictable, price move could mean a pretty penny.  
3. A move to safer ground seeing that the Fed has reaffirmed that yes, things are slightly less rosy than when they made their emergency rate cut.  Thus, when you see your position spike for no good reason, you’d sell and get into something else…or maybe take your position down and wait until tomorrow.

Now, I’m not a economist or even a stock market analyst, so don’t get too worked up if you understand this much better than I do.  I know this is an oversimplification, but my understanding is that rate cuts are applied when the economy is slowing down.  So when the seven economist types that sit on the Federal Reserve Board of Directors get together, and six of them vote to cut rates by a half a point,  my take away on that would be some concern that there could be some problems in the short term with the economy.  Problems with the economy usually doesn’t bode well for most stocks.  At least until the stocks account for the expectations in the stock price.  So when I see a rally like I saw at 2 P.M today, I try to think about what the people were actually thinking.  The truth is, the people that were buying weren’t really thinking. 

Those that were buying, for the most part, were buying based off emotion.  That’s pretty dangerous when you’re making a purchase.  Whether it’s a stock or a new home, it’s a safe bet that you should only make the purchase if you really understand what’s going on.  What is the asset worth?  Do I need to buy it now?  What’s the advantage of buying right now?  If I wait, do I miss an opportunity or will I pick it up next week cheaper?  Do your homework.   For the stocks today, the simple explanation of it is that everyone expected that there was going to be a 50 basis point cut today.  They’ve expected it for weeks.   It’s been so expected that it’s already priced into the stocks.  So when the Dow Jones Industrial average goes up 226 points without any real basis for it, and especially since the underlying factors actually suggest some negativity in the underlying assets, the smart money that already owned the stock would probably sell,  right? 

In case you didn’t catch the Today Show this morning.  A home buyer in San Diego is suing her Realtor since she discovered she paid $175k more than her neighbor did for their house.   She blames her Realtor for allowing her to ‘overpay’ for her home.  I’ll go out on a limb and say she doesn’t have a chance at proving the malicious intent that is required by law to prove this unless her agent really screwed it up by selling her his own house without disclosing it.  That being said, here’s a few things to remember when buying a house.

1.  Buying a house?  Do your own homework. Validate the comps the agent supplies to you with at least a drive-by.  Develop your comfort level with the price and learn to ask the right questions.   Your Realtor isn’t there to try to second guess your decision to purchase the home.  He’s going to provide you with information about whether the price can be supported or not.  Most of the time they may try to show you what else is available even though many buyers just get sick of looking and want to buy the house they think they fell in love with.   The more experienced agents aren’t going to talk you out of buying a home.  They are there to sell you one, remember?

 2.  The appraisal isn’t really what the home is worth.  There’s no absolute value for a home.  It’s simply an estimate of what the home could be worth on the open market at a particular moment in time when compared to other homes that have sold.  It just means that the price can be supported, at least theoretically….that’s it.   The only time there is an absolute value for a home is the moment it is sold.   At that very instance it has a value.  Ten minutes after you walk out of closing…things might have changed. 

3.  Trying to compare your home to another persons home just isn’t that easy.   It would be like trying to compare two similar women that were 5′6″, 115lbs with blond hair and saying they can both do the same job.  Upon further examination you discover that one is a the female executive of a Fortune 500 company and the other is the meth-head that lives in her alley.   Every home has unquantifiable characteristics that will make the home different from the neighbors house.  The wear of the carpet, the view from the yard, the smell as you enter.   Not to mention the motivations of the seller that may have influenced the final ‘value’.  All of this could easily turn into 100k or more on a million dollar home. 

4.  A home is worth what you pay for it assuming of course that you know what you’re paying for it,  how much that works out to a month, what similar homes have sold for in the past, and most importantly what other homes were available when you were shopping for a home. 

5.  Start asking questions when you don’t understand.  If you don’t trust the answers you get or don’t understand the answers you get, ask again.  Ask other people.  And most of all, ask yourself.  If you don’t know the answer, look it up. 

I don’t mean to be condescending to homebuyers.  On the contrary.  I simply want them to make sure they are awake to the truth that they are the ones that will be paying for the home.  So instead of just saying it’s the biggest investment of your life, act like it really is.  Otherwise, Caveat Emptor.   Finding the right Realtor for you and educating yourself as to the process (or even allowing yourself to be educated) are very important parts of the home buying process.   If you’re not ready to do the work, you probably aren’t quite ready for home ownership.