Powayseller, I realize I did not address your comment:
“cabinboy, how did the average American do following your 4-step plan when they were buying up homes to flip? Or just buying a house at the top of the market with an Option ARM because their tax guy said it would save them on their taxes? How well off is the average investor who followed this 4-step plan?”
The average investor who was doing this was not following a solid, comprehensive plan (at least those that were utlizing high margin mortgage instuments based on *very little* cash in pocket). Many were completely ignoring a chief risk in housing: the potential lack of liquidity. These investors were obviously inspired by their (correct) belief that the near term likelihood that housing prices would increase far exceeded 50%. However, even prior to 2005, leading indicators were beginning to suggest that this probability was starting to level off in some of the “canary in the gold-mine” markets like San Diego. At that point, housing’s well established potential for illiquidity pushed the risk-reward ratio away from housing speculation. Folks more savy than the average flipper perceived this change (for example, Rich and Ben).
With obvious booms occuring in China and India, commodities became a safer choice. There’s been all sorts of ways to profit. You don’t have to just buy copper or steel or gold. For example, given the average American’s seemingly high tolerance for risk and obvious comfort with doing things on margin, they could have made an absolute killing on various commodity supported carry trades in the FOREX market (a market with infinite liquidity at any trade sizes relvant to the average Joe). People have taken risks in housing that dwarf the standard risks in FOREX (with no stop-loss!!), but the avaerage flipper had no concept that this was the case. Folks more savy than the average flipper perceived this, and have been rewarded accordingly without getting any paint under their fingernails or granite countertop dust in their lungs!
By now you can probably tell that my philosophy is that anyone who wants to beat the performances of general indexes needs to know how to profit (or at least not lose) in a variety of markets. I may be right, I may be wrong, but this is precisely what hedge funds do. Hedge funds that do not suffer catastrophic failure typically beat index funds over time. Catastophic hedge fund failures typically occur because inherent risks were underappreciated or mischaracterized, not because a specific market was entered at an improper time.
