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Don’t put all your egg baskets in one egg truck

Clay Sparkman

Colloquialisms are funny things.  We use them pretty much every day in our speech and in our writing and yet most of us, I suspect, though we know the meanings of the expressions, frequently don’t know why the individual words have come to mean what they mean.  Take for example: “Don’t look a gift horse in the mouth.”  I must have been in my forties before I looked up one day, scratching my head, and mumbled to myself, “What the heck does that really mean?”  I remember asking my Dad about it. Having grown up on a farm he was able to explain to me without hesitation that it was a little like what tire kicking is to automobiles.  So, there you go.  It all makes sense–if you know something about farms and horses, that is.  And while we’re on that topic, does anybody really do that: kick tires I mean?  I have purchased maybe ten cars in my life, and I’m pretty sure I never actually kicked the tires on any of them out on the showroom floor.  And still, it is a great image.  I wish I were that kind of guy who could pull it off.

So with regard to investing, the egg analogies are kind of funny.  First of all, there is “the nest egg,” which seems to refer to one’s entire savings or investments.  It is singular however you will note.  You don’t have nest eggs.  You have a nest egg.  But given the fate of Humpty Dumpty and the fragility of eggs as such, we almost can’t bear the thought of our entire fortune being so fragile.  (And yet, if we don’t invest intelligently, maybe it is.)

And so of course to that end, we attempt to diversify our investments—and pretty much everyone is familiar with the expression, “Don’t put all your eggs in one basket,” which immediately makes sense as an analogy—that is until you stop to think about it.  Follow me here: if each egg represents a single investment, then perhaps each egg basket in the analogy represents an investment type or sector, and if you think about it, you still don’t have a secure investment strategy here.  Say you have ten baskets, each with a handful of eggs in them.  Are you going to keep those baskets stored all in one place, and how are you going to transport them?  Surely you must never put them all in the same egg truck!  I would like to propose thus a revised version of the expression.  Can we all get on board with “Don’t put all your egg baskets in one egg truck?”

So then what is your point, you ask?  Well I do have one, and it is about diversification as it relates to trust deed investing.  Most investors—dare I say—view trust deed investing as a single egg truck and put many of their egg baskets (but certainly not all) in their “trust deed” egg truck.  And this is where we need to get really specific about this whole issue of egg security.  Almost all the investors I have worked with over the years have been quite certain that they didn’t want to put all of their trust deed money into one single trust deed investment.  That is practically a given.  Typically, an investor with say, one million to invest in trust deeds will look to put that into somewhere in the range of 5-10 separate trust deed investments.  So, we are all agreed that a dedicated “trust deed” egg truck is needed.

However, I would go a step further and suggest that if you are seriously involved in trust deed investing, you may want to deploy a small fleet of egg trucks just for trust deed investing.  And how does one do this?  Well, I used to think that this could be accomplished nicely by putting some into subdivision projects, some into home construction projects, and some in standing homes and commercial buildings.  But now I’m not so sure: when the real estate market for residential property tanked, residential subdivisions, residential construction, and finished homes all began to merge into one big thing.  Yes, they were all at different stages of the production process, but ultimately, they all became one thing: residential homes.  And those homes all had to be sold or refinanced ultimately at the level of the individual homes.  (The residential river flows in one direction, and always comes to the same point where the river meets the sea.)  And in retrospect, commercial vs. residential didn’t provide as much real diversification as I would have hoped.  Though residential property was the first to fall, commercial seems to have more or less followed along (lemming-like) on its heels, and really not so far behind.  So: perhaps this type of versification was more like putting different types of egg baskets in the same “trust deed” egg truck (as opposed to deploying multiple “trust deed” egg trucks).

I would suggest that perhaps the best way to obtain effective diversification in trust deed investments is to invest in multiple geographic locals.  And in particular, I am thinking on a state by state basis.  For many investors, this goes against their fundamental instincts because they feel safer investing close to home, where they know something about values and where they can deal more effectively (they feel) with the property if they have to take it back.  Those are valid issues and such instincts should not be ignored, but it is important to weigh against them the fact that the massive depreciation in home prices which continues to occur nationwide, happened at widely varying times and to vastly different magnitudes in varying states across this nation.

So not to pick on anyone in particular, but If you think about it: when sub-prime hit the fan in 2007, if your only “trust deed” egg truck was a sixteen wheeler with “SoCal” printed in large letters on the sides, you and your egg baskets were in for a long, rough, treacherous ride down the mountain-side.

— Clay (clay@privatemoneysource.com)

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