Are you awake to see opportunities?
Why is it that some people have the knack to see an opportunity and seize it, and others just watch them pass by?
It is Q3 2019 as I write this, and all I am seeing on the news media is the word “Recession” thrown around in abandon on all the financial news channels. This is the new “clickbait” to try and scare people into watching their shows. But here’s a completely contrarian view of the topic that might give you a positive view and why I LOVE recessions
I have written before about how the universe is rich in cycles. Things go up and things go down. These waves create a balance – a “Ying & Yang” if you like. Like electricity, there are positive and negatives that create waves that generate the power we rely on. For every upward motion, there must be a downward motion to balance it out. If you want to know more about, this you should read my article “Forget Education, learn to Surf”.
We have had what the financial folk call a “bull market” for a long time. They can’t last forever and the natural reaction is to have a “bear market”. The bull market is the upward cycle of growth, and the bear market is a retraction. Everyone gets excited over bull markets because they think they are making money. And they get depressed with bear markets because they see retraction, job cuts, lower returns on investments, etc.
If you are a real estate investor, you may be aware of this statement, but it is true for anyone in the world of capitalism:
YOU MAKE MONEY WHEN YOU BUY SOMETHING – NOT WHEN YOU SELL IT
What does this mean? Well if you are investing in property, the money you will eventually make if you intend to sell it, is the difference between what you bought it for and what you sell it for. Sounds pretty simple, right? The fact is most of us forget this. We live in a world of FOMO (Fear of Missing Out) and the heady exuberance of a bull market is great for the news media, but the truth is that bull markets represent higher prices and exclude us from participation. But when the markets go south, and the prices plummet, that is when you make your money.
In 2008, we had a massive financial crisis that created the greatest financial recession we have seen since the 1929 great depression. But in 2009 and 2010, when the hangover of financial disaster was still weighing heavy on the public, I bought five (5) multi-unit investment properties in Arizona. And I paid pennies for them. They were foreclosures or near foreclosures and the owners just wanted out. They needed some cleanup, but I literally paid 20c on the dollar compared to the price that they were selling 2 years prior. Why? Because people drank the Koolaid and needed the cash fast. This is when the rich make their money. It isn’t when times are bullish.It was Baron Rothschild who famously said, “Buy when there’s blood in the streets” and it has become the rallying cry of the contrarian investor movement.
Today those properties that I bought in 2009/2010 are worth six times what I paid for them – in 10 years or less. That’s what I call a great investment. But since about 2012, the opportunity to buy has been reduced. The foreclosures got scooped up by investors and that was that. Banks wouldn’t loan money even though interest rates were reduced and it was very hard to get into the market. Over the years, it loosened up a bit and even today you can buy relatively easily in real estate at historically low interest rates. There has never been a better time to invest in the market, but the problem is that the price of real estate has gone quite high. But those with short memories are the only ones crying over this. Those of us who got through 2008 remember just how expensive interest rates were back in the early 2000s and to us, this is a huge opportunity. If only the prices were lower.
But wait…. I hear the word “recession”. You can imagine how exciting this sounds.
You know the saying, “One man’s trash is another man’s treasure”. How apt in 2019. I love trash. I can clean it up and turn it into treasure. That’s how we make our wealth in the world of the unconstrained.
If you have been patting yourself on the back for the great returns you have seen on your investments, your 401k or your IRAs, now is the time to get real. Sorry, but you are not as smart as you might think you are. The truth is that everyone makes money in a bull market if you already own assets. But the real money is made when everyone is running for cover and you are ready with cash to pick up the bargains. That’s when you make (as Doug Casey calls it) a “ten bagger”. A ten bagger is when you get 10x the return on your investments. Yes, that’s right. 10x. Not 10% return. 10x return.
How do we do that? Easy. Buy when no one wants something, clean it up, wait for the market sentiment to change (might take 5 years, so be patient) and then sell it in a bull market.
So if there is a recession coming, you could see returns like you have never seen before if you have the stomach for this ride. This is the ride of the mega-rich. You can choose to participate if you have the cash at the right time. But if you are following the mainstream media, go back to the herd because you will likely get slaughtered if there is blood in the streets.
But if you have the constitution for this, then read on….
In times of recession, it takes hard skills to make money. Yes, the money is always out there, but you have to be prepared to do more to get it. That’s fine for those of us willing to do more. But for the many that have signed up for the “I can make 10% returns on my Vanguard Index Funds”, you are not ready for a recession. So many people I have seen have congratulated themselves on saving $1 million (or even less) and deciding to toss the shackles of employment and embrace early retirement. Many of those that did this were not working before 2008. They had never seen a bear market in their lives.
Recessions will have drastically lower returns. 1-2% might be more like it. And if you are heavily invested in equities, you might see your entire savings ½ over night. Yep, that’s what happens if there is a stock market crash. And we have seen them repeatedly. 1987, 2001, 2008…. Just a few that come to mind. If you look at the time periods between these, you can see that we are well in line for one now.
The contrarian investor would likely have exited equities by now. I did that and went to Gold back in 2018. I bought gold at $1,185 an ounce. Today that is worth $1,500 an ounce. Not a bad return for 12 months. I’ll sit on gold until the dust settles and then be ready to swoop in and grab some bargains again.
You see, and I’ve spoken about this on The Unconstrained Podcast, you need to understand business to thrive in capitalism. And if you want to get extra-ordinary results, you cannot do ordinary things. That means being a contrarian and trusting your gut to know when to get into an investment and when to get out. I must say that I cringe when I hear people tell you that you should always be buying into a market. They use terms like “dollar cost averaging” and other fictitious, made up math terms that make average investors (rephrase that as “herd investors”) feel good about themselves. Money is made when you buy low and sell high. That’s it. That is math. You can’t argue that math.
So ask yourself, what do people hate right now? What investments are conservative analysts telling you not to buy? Then get ready to buy them when the prices hit rock bottom. When is that? Well understand the investment before you jump in. If you are buying something you don’t understand, you are a fool. And a fool and their money do not stay together very long.
These are the times when the best thrive. I always remember something I learned as a kid and has always held me in good stead throughout my life:
SUCCESS = Preparedness + Opportunity
Regardless of what the media might tell you, there are always opportunities out there. They are often hiding in plain sight. But they are always there. The thing is whether you have the ability to see them. This comes down to your training and your sensitivity.
The preparedness kicks in once you see the opportunity. If you are looking to invest in crypto-currency, for example, do you know how it works? Do you understand it? Do you know what a blockchain really is, or are you just parroting what you heard on some YouTube video? Do you understand “network effects” and whether your chosen coin actually has a purpose? Have you ever used your coin to transact? For example, if you are thinking of speculating in Bitcoin, how about you first try using it to buy something on Amazon with Purse.io. Just something where you can get a sense of just how it works. Once you do that, at least you have had a taste of it and then maybe you can understand the opportunities that lie in front of it. That will drive price. Not what someone else says on TV. It is what YOU see with your own eyes. That’s preparedness.
Or maybe you are looking to buy some precious metals or commodities. Do you know how they produce that product and what could impact its price on its supply chain? Do you even know what a supply chain is?
Once you feel that you understand your target, you wait for the right time to pounce. Picking the time comes from you understanding the economy of your target and what drives pricing up or down. That means more learning – more preparedness. But this is all done before you spend any money. It costs next to nothing to get prepared. But those who are not prepared and go in, are fools. And we all know what happens to fools.
You want to be the shark. A shark is no fool. A shark is prepared and circles its prey before it pounces. Maybe your prey is real estate. Have you visited the neighborhood where your target property is? Do you understand what a day in the life is like for those who live there? Do you know your competitors? Do you know your market rents? Have you uncovered alternative purchasing channels that are out there? Maybe you don’t need to purchase a property directly, but you could be part of a consortium for this at a lower entry level.
Research is something you should always be doing. You should never stop. You are trying to see the opportunities as they present themselves. You want to be the first to see them so you can get them before your competition does.
There is a reason why everyone is not rich. Because if everyone was rich, who would be the poor? The world is full of stories of some kid that rose up from nothing and became the hero; the millionaire. But most of that is just Hollywood stories to make us feel good. For 99.9999% of us, this is not something that happens. That is because we are never trained for it. Not everyone can be a winner, and you don’t get a prize for participation.
Deprivation is a great teacher. Hunger is one of the best motivators. It is because of these things that so many new millionaires are immigrants. Yes, that is right. Check out this article: https://www.washingtonpost.com/news/business/wp/2016/10/05/a-record-number-of-the-u-s-billionaires-are-immigrants/
One of the reasons I’m very “open borders” is because of my own story coming to the USA from Australia. I’ve followed in the same path as those immigrants. I’m self-made and hard working. But I’m a shark. That’s a key thing – I can sense opportunities because in Australia, where I am from, I didn’t have access to the opportunities in the 1970s and 1980s and I learned to seek them out. I’m willing to look under rocks for them - most were not. I honed that skill and when I brought it to the USA, I found a lot of rocks. Millions of them in fact. I looked under many and I found my opportunities. While I was doing that, I was shocked NOT to see everyone else doing the same thing. They would just follow the path that some guy they had never met before told them to go down. The TV pundit, the college professor, the 3AM Infomercial, the “Get Rich Quick” book author.
I realized that I had to be the best “me” I could be, and I had to push myself harder to find and exploit those opportunities. I had little in common with those that didn’t share that same zeal for opportunities. I tended to gravitate to those that had answers to questions either I had not yet asked or that I was on the verge to ask. But with that, I still needed to validate my own questions with my own answers. Consequently I became the shark.
It doesn’t always work out as planned. So that means you shouldn’t go into an investment with money you are not afraid to lose. But with that said, you should not waste your time trying to participate in a market unless you are firmly committed to it. Once you decide to act, act hard. Act with passion and act with excitement. Know that you will fail, but don’t let that stop you trying.
I had the chance to work at a Venture Capital firm as a contract software developer once in California. I went out to lunch with one of the partners and he told me something valuable. He said that in their line of work they invest in ten (10) ventures. Five of those will fail. Hopefully they won’t lose too much money but they expect to. Three of those will make money, but not that much. One will do very well. One will be a ten-bagger; that one will make more money for them to offset the costs of the others that don’t and ideally they come out way ahead in the process. That one investment might be a Google or an Apple. They only need one of them to make all the other look pointless. But you don’t go from zero to hero. You have to keep pitching – keep trying and know when to cut your losses and get out.
Risk mitigation is a big part of your preparedness strategy. It is like any contract – it isn’t about an agreement that works when things are all rosy and times are great. It is an agreement that foresees the bad times and challenges and helps you mitigate damage when things are going badly.
Recessions are bad – particularly for those with jobs. But you know the mantra here at Be Unconstrained:
THE RICH DON’T HAVE JOBS
If you are selling your time by the hour, you are likely to be the first sent to the slaughterhouse when the company is forced to downsize due to a recession. But if you don’t need to rely on income from your labor and you have the reserves available, and you have the lowest possible burn rate, you will get through it and still be in a position to be the shark and seize your opportunity.
Remember – preparedness isn’t just about knowledge. Preparedness may be having cash reserves in savings that can cover your burn rate while you are waiting to pounce. That could take a while, so if you have embraced the art of Financial Sustainability, you can wait comfortably knowing that you have a regular cashflow from your past winnings to get you through to see the next round of opportunities.
When I had my first company, I got called to develop computer software for a small town in outback Australia that had a population of 300 people. Yes, it was that small. It was in the middle of nowhere in South Australia and they had managed to run some power cables from another town about 100 kilometers away, and built a power distribution facility for their local township. This was in the early 1980s. They needed computer software developed that would allow them to keep a ledger on their township and their power usage, so they could bill them back for it. I basically had to create a mini-power company (or at least the administration of one). My software would print out the “meter reading sheets” and a local council employee would go out to each house and read the meter, writing down the readings on the sheet and bringing it back to the town hall and entering it into the computer, thereby creating the billing statements that would be mailed out with the bills.
One day I was sitting in the town hall with the mayor and over the radio came a call that there was a massive bushfire coming near the town. They sent out the fire department (mainly volunteers) from the town to combat the fire. To be honest, I was scared. I thought we were all going to be killed in a massive bushfire that was going to overcome the small town. I asked the Mayor about the danger.
He told me something very important. He said that they had it contained and we were safe. But that this is all part of normal life in nature. That in the natural world, old growth (like older trees, etc.) need to be killed off to make way for new growth. And that nature has a way to do this.
I realize 35 years later that this is also something that happens in economics. Recessions are like bushfires. They kill off companies that should have never been there in the first place. Or that are so old that they are dinosaurs, sucking the nutrients out of the marketplace and depriving newer ventures the chance to exist and grow. You see, recessions are necessary. And although they represent the loss of money for many, they represent opportunity for many as well. The question is whether you are prepared for them and prepared to see the new opportunities present themselves as a result of them.
So embrace recessions as a positive thing. If you have made decisions to exit the world of work and based that on some deferment of responsibility for income generation to a third party, then I can’t help you. That was a foolish decision. You have to learn to live with your decisions, dust yourself off and get back on the horse again. But if you chose to enjoy the benefits of the bull market and turned that into a way to pursue a life that had meaning, you are a hero. Just remember this is capitalism and you must participate in the marketplace.
Embrace the recession as a natural way of economics. Know that the unconstrained benefit more in recessions than in bull markets. You make your wealth when you buy something – not when you sell it, and you have to have the courage and preparation to be the shark and win. And yes, not everyone is a winner despite what your parents or politicians may have told you.