Investing: How to be a Smart Investor in a Tumultuous Economy – Part I
By
Hello!
I have something special for all of you today. I have invited my friend, Paul Lufkin, to write about his thoughts on successful investing in our funky economy. Paul is an economist as well as the owner of Living Water Funding. When Paul speaks…..everyone listens including me! Paul has committed to write a five-part series on “How to be a smart investor in a tumultuous economy.” Today, you can read part one below. Please remember to register your email in the left hand corner so that you can be sure not to miss Paul’s future segments. Enjoy…….
How to be a smart investor in a tumultuous economy – Part I
By Paul Lufkin – Living Water Funding http://www.livingwaterfunding.net/
What is happening to our economy? Are we in a temporary cyclical downturn or is something more fundamental afoot?
I’m of the mind we are in a structural paradigm shift that will change our basic assumptions concerning investments. Smart investors recognize this and are doing things far differently then the typical investor. Heck, even sitting on the sidelines until you get a clearer picture of what is going on will turn out to be a winning play. As boring as it sounds, you will be much better off than following some of your conventional wisdom concerning investments in the past. Don’t be an investment lemming right now. Stop and take stock of all your assumptions.
When the dot.com bubble started crashing in the late 90’s, the Fed was alarmed and started looking for another bubble to prop up our economy. Where did they look? Real Estate. The sub-prime mortgage mess was nothing more then the blessing of the Fed to produce a “collective looking of the other way” while a vast segment of our population not normally qualified to be a part of the banking/real estate industry became major players for the first time. Did it work? Sure, for about 4 years in the early 2000’s fortunes were being made accommodating this unlocking trillions of wealth coming into the market.
But now the chickens are coming home to roost. What is the unraveling going to look like? It is helpful to know a bit about the law of gravity right now. The Fed is limited in its ability to defy this gravity. They are trying to push on a string to get it to move. The string won’t move, it can only get pulled to move. The Feds can no longer pull on the string of the American Economy, they are now pushing it. There is a little movement but, ultimately, the string is not moving. The trillions that have come into the real estate market are now coming out. Fear and greed of the market is more powerful then any government action. Always has been, always will.
What to do in this economy? Don’t invest until you get a crystal clear view of what this new investment paradigm is going to look like, pure and simple. Cash out, stay liquid, invest in precious metals you can readily get to as well as cash. Precious metals will be a hedge against inflation and cash a hedge against deflation. My particular percentage diversification is 70% inflationary hedge and 30% deflationary hedge.
But if you must invest now, here are some pointers:
#1 Search out large holders of real estate where their balance sheet right now is far more important to them than their income statements.
I’ve heard some investors bragging how they’re getting property for 70 cents on the dollar. I think they are getting the short end of the stick.
There are successful investments coming down at 25 cents on the dollar. If you must invest, set your point of entry at much lower then what you thought a good deal was before. Why? Because you can get them if you’re patient. Trillions are coming out of the market. Get ahead of this curve. There are desperate large developers out there who want to shift large amounts of real estate to a cash position. They want to shore up their balance sheet for their banks.
#2 Purpose in your mind that you will be prepared for a coming economic disaster. Position yourself and start to develop a comprehensive plan that as people begin losing their heads and make emotional decisions, you will keep yours and will coolly profit from the situation.
#3 Tap into some unsecured commercial lines of credit from banks. I know of one major bank giving an unsecured $500,000 line of credit, minimal documentation, fast closing (they really need production). Layering several of these banks together and having these funds at the ready will position you for some great opportunities to get in and out when people sell in a pinch. The nice thing about these lines of credit on your business is that they don’t show up on your personal credit report and you don’t pay interest when you are not using them. Prime plus 0 is not out of the question for select borrowers.
Next – Part II Specific Real Estate Investments that do well in an inflationary environment.
Part III Specific Real Estate Investments that do well in a deflationary environment.
Part IV Some historical examples of successful real estate investment during times of financial crisis.
Part V Some historical examples of successful investments during times of financial crisis.