Billionaire hedge fund betting on land

Should you follow suit?

By Jamie Dlugosch Mar 1, 2010 12:31PM

Capitalizing on distress is a strategy as old as capitalism and has its roots in evolutionary behavior. The weak flounder and the strong survive.

 

The latest example can be found in the investment activities of billionaire hedge fund manager, John Paulson. Paulson made a fortune betting against the housing market prior to its collapse. (Can American stocks make you a fortune?)

 

Now in the aftermath hedge funds including Paulson are trying to make a killing betting on raw land that can be bought at discounts from owners in distress.

 

Paulson is an incredibly astute investor. Since making his mint in the bet against housing he has taken big positions in banks and gold.

 

Should you follow suit with his bet that land prices will skyrocket once again?

 

I think the answer depends on your time frame.

 

Prior to home prices going nuts land speculation was a long term proposition. In some cases that long term meant years or decades before developers could find enough buyers to justify extensive homebuilding.

 

If you invested in land, you usually had to wait before getting paid.

 

That all changed with the boom that started in the late 1990’s. Homebuilders could not get enough land to fulfill demand and prices skyrocketed. Of course much of that demand was artificial and the house of cards fell like dominos.

 

What then are big hedge funds doing speculating on land today?

 

The answer of course is opportunity. Exploit weakness with capital that others simply do not have. Those left holding the bag from the devastation in the housing sector jettisoned land more quickly than demand required.

 

As a result land prices fell off the precipice.

 

What hedge funds are doing today is taking advantage of inefficiency plain and simple. It is doubtful that they are investing for the long term. Instead they pick up land at auction and wait for a homebuilding to come begging.

 

If the price is right the hedge fund will get paid and get paid quickly.

 

For most of us average Joe’s land speculation needs to be kept in perspective. Over the long haul demographics suggest that land investments make sense. Scarce supply even when demand for housing is low will ultimately lead to higher prices.

 

It just might take some time, but if you are willing to wait you will likely get paid handsomely for the effort. (10 stocks for those not interested in dirt)

 

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