House Money; Auto Consolidation #122
Reflecting on a few interesting reads and listens over the past week
House Money
This was a good post by Jack Raines on the concept of House Money and how that's affecting the way younger investors make decisions today.
The house money effect is a theory used to explain the tendency of investors to take on greater risk when reinvesting profit earned through investing than they would when investing their savings or wages.
While the thread/post above refers to crypto millionaires, the reality is that each asset class has seen a fairly substantial increase over the past ~18 months leading to a number of investors across multiple asset classes 'playing with house money.'
If you don't believe this, take a look around you and see how many people are all of a sudden concerned about macro factors (e.g. interest rates).
The idea of playing with 'house money' has also given investors a sense of entitlement where asset values are simply expected to go up. Cutting corners around diligence is encouraged and often necessary to stay competitive. In an era where asset prices continuously go up, it's easy to hide mistakes while still making an acceptable return.
This ultimately comes down to a concept that is best explained in this excerpt from Morgan Housel's essay on Getting Rich vs. Staying Rich.
“I’ve noticed a pattern: Getting rich can be the biggest impediment to staying rich.
It goes like this. The more successful you are at something, the more convinced you become that you’re doing it right. The more convinced you are that you’re doing it right, the less open you are to change. The less open you are to change, the more likely you are to tripping in a world that changes all the time.
There are a million ways to get rich. But there’s only one way to stay rich: Humility, often to the point of paranoia. The irony is that few things squash humility like getting rich in the first place.”
Jack also aptly explains this in the context of poker:
It’s the hand that wins 99% of the time, and you bet like it wins 100% of the time, on an instant that happens to be the 1% of the time. The only way to avoid the most dangerous hand in poker is to stay wary of the pocket 2s. But the only way to get rich quickly is playing like the pocket 2s will never happen.
Mortgage Payments Adjusted for Inflation & Interest Rates
Speaking of house money (pun-intended) - this is an interesting view on how mortgage payments would look like adjusting for inflation and interest rates relative to 1990 (see original post here). As a side note, I'd play around with the interactive graph and see how the chart below maps to specific markets in the U.S.
"The shocking truth is Millennials in 2020 have lower Real Monthly Mortgage Payments than Boomers did in 1990 for the equivalent house in many areas. The Real Cash Price, however, is much higher in 2020 and Millennial mortgage debt is shockingly high. Because they have so much more debt, fewer Millennials will be able to pay off their mortgages early. Millennials have more debt, longer.
And Millennials definitely won’t have the Boomers’ tailwind of decades of falling mortgage rates. Millennials won’t see decades of increasing family home equity wealth and decreasing monthly mortgage payments due to falling mortgage rates like the Boomers did."
While this may help justify current real estate valuations, it doesn't account for home affordability. It'd be interesting to map this against a household's monthly income (adjusted for inflation) and understand home affordability for the average household. My guess is that millennials at the moment don't have the benefit of both falling mortgage rates and rising wages - impacting their ability to afford real estate (in a similar manner to previous generations).
Auto Consolidation
This was an interesting deep dive into the auto industry and the opportunity that can come with a potential consolidation. I personally found it interesting to learn a bit more about how auto manufacturing works and the level of overlap between companies. It reminds me quite a bit of telecom and retail where the businesses are largely differentiated based on brand and consumer-facing offerings (not the underlying operations).
Here's a look into the overlap at the product development level for new cars.