THIS IS A TIME RELEVANT POST
The date is March 16th, the DOW dropped 2400 points this morning.
In the midst of the chaos of today, I wanted to get some thoughts out about current events.
I write this article not to tell others what they should do, but to tell people what I’m going to do. The hope is that readers can take what is useful here and fit to their own needs.
I have very little worry about the Corona virus itself and this article does not discuss it's impact at all, this is 100% about the economic fallout that will occur due to the halting of business operations and the inability for people to manage that turmoil.
This is a period of HIGH volatility and uncertainty so I can’t claim to have a crystal ball but I have spent a considerable amount of time reading about risks like this and I do risk analysis as a career, so in many ways I’ve spent the last 3 years preparing for an event just like this. I also like the potential to help people so I’m using my skills and experience to write this as a means to help the best I can but from a position of leading from the front rather than giving unsolicited advice.
Know that I have to manage the balance of this article to keep both the stock market and real estate in mind. The stock market is the one taking the damage now, but real estate investors are my main audience. These asset classes are connected but they aren’t affected by events in the same way, so I’m trying to provide insight that is applicable to both which is a difficult tightrope to walk.
I'm going to provide a few 'rules' to consider while moving forward. I'm NOT going to provide specific advice one what YOU should do because everyone's situation is different. There is no magic answer about what to do, the key is to create a situation that gives you maximum advantage while limiting your exposure to risk.
Rule #1 Respond, don't react
The stock market is falling like a rock the last few weeks. Some people are using this to see a buying opportunity and many are in misery watching their 401k accounts free fall. Both of these are emotional responses and are the bane of all investors, remember that emotion of any kind is the worst strategy an investor can employ.
Similar to being fearful, being over excited at the possibility can be detrimental too when it causes us to make quick and brash decisions. The stock market fell 20% so there are absolutely discounted assets to be bought but does someone need to jump on that opportunity right now? If all goes perfectly one might get that 20% margin to their benefit (which is no small feat) but a 20% gain isn’t life changing and if the market tanks another 20% that person could make their situation worse rather than better. There is too much volatility to be certain of what will happen and it’s not necessary to do anything from emotion or fear of missing out.
For those that already have a strategy in place and the market changes are providing them opportunity, then absolutely they should capitalize. For new investors though, the desire to get involved in the market now will get many people in trouble. Investor sentiment and confidence is delayed from market events, usually by months or years. This means that it will take time to really see the fallout of recent events (see the "Lake of Liquidity" below).
Reacting is emotional and creates hasty decisions that follow a market rife with volatility, this is not a prudent way to behave. Instead, I’m spending my time paying close attention to the market and watching how the effects manifest, then I’m responding to those in a strategic manner. The difference is really in timing, I don't make decisions for today, I make decisions for tomorrow.
For example, 8 months ago I knew the market was overpriced and in need of a correction and I knew that investor sentiment was dragging way behind that, so in November I sold my house in Las Vegas and I sold 20% of my stocks and bought gold instead. That’s what I actually did and I did it in preparation for a correction in 2020. At the time many thought I was silly, now I seem like a genius. The goal here is to show that paying attention to market can allow one to respond to it, rather than scrambling to react.
Reacting to market conditions would be formulating a plan today to deal with today. That doesn't work, it's like running off to buy a gun after you were already robbed, it's too too late now! The correct thing to do is hold tight and start creating a strategy to respond to the market conditions that will manifest from this week's events. No one can go back and prepare for today, but we prepare our response for the future.
I know that real estate buying opportunities will increase in the coming months, I'm planning to respond to that behavior when it arrives. In the short run real estate will continue to go on, although it'll certainly slow a bit. The stock market may tank for a little while longer and I plan to buy some of that when the dust settles. I am in no hurry because I don't gamble, I invest. I don't react, I respond.
Rule #2 Live in optionality
Optionality refers to a situation where there is little downside and a large upside. This is something I try to implement all the time but now it is more important than ever. Now is not the time to enact high risk high reward decisions, now is the time to make low risk/high reward decisions.
Wouldn't I want all my investments to havef low downside and high upside? sure! but that's just in terms of risk, there is a reason some of my suggestions won't have broad appeal, they have long lead times and are boring.
These are good strategies but not very sexy. I'm not thinking about exciting things right now though, I'm thinking of how to survive the unknown risk of the storm. Here are three examples of things I’m leaning into heavily that have low/no downside risks but incredibly high returns on investment.
The least sexy of all investments and yet the smartest thing a person can possibly do. Education has an unlimited upside potential because learning allows us for better decision making forever. Knowledge compounds in incredible ways and I’m of the opinion that books have the highest return on investment of anything we can do.
Reading also just allows us to make the time go by. At the time of this writing it looks like people are going to be locked in their houses for a while and passing the time is itself going to be a difficult journey. Learning allows us to maximize that free time and continue to be productive with almost no cost, it fits perfectly into Rule #1 - reading prevents us from reacting and slows our decisions down.
Also, books are dirt cheap and don’t spoil, which is why they have no downside. It’s impossible to go bankrupt buying books and it’s much more likely someone will get rich from buying books.
One of my 2020 strategies is going hard on Youtube and now I’m even more convinced than ever that this is the right approach. I think most people would benefit from creating content as well, whether it be video, writing, or podcasting.
There is almost no cost to produce content but the potential upside is unlimited. Many people are going to spend the next few weeks trying to cure boredom through video games and watching the same TV shows over and over again, instead I’m going to try and become the content they consume rather than just being another consumer myself. Most importantly, there is no downside to trying. Content creation is perfect optionality.
Part of my content will be Youtube discussions about current events that I started last week. This is a little rough but it’s an idea I’ve been formulating for ~2 years and now is the time for me to expand on this.
I’m going to spend a lot of time planning my future. It costs me nothing to spend time with other investors, build spreadsheet projections, write out business plans/ideas, and learn all that I can. Writing my ideas helps me explain the nuance where I find that many of my ideas aren’t that good, ramping up my efforts in this area will allow me to really prepare for upcoming market changes without taking any additional downside risk. I’m using this time to slow down from taking action and spending much more time on strategy. This fits both rules #1 and #2.
I still allow people to video chat with me for no cost, and I'm happy to help other people create their strategies as well. If you want to meet over video, or in person, reach out and lets put some plans into action.
Rule #3 Stay relevant
The virus may come and go but the economic events from this week are going to linger for months, if not years. There will be bankruptcies, there will be failures, many people will go away and we will say goodbye to many success stories we’ve heard in the last ~3 years that were based on the overall market being up. We are about to find out who is lucky, and who is good.
The most important thing to me is not growth, it's preservation of capital. Now is not a time I’m using to get rich, now is the time to make sure I survive this no matter what. Opportunity for expansion will come, but at the time of this writing the sky is falling and it’s not done yet so I will not risk failure just to make an extra margin (see rule #1).
Staying relevant means pushing forward through this battle while keeping your voice heard. I will continue to post content and I will continue to buy houses when/if i can as long as it accounts for the current market risks. For investors and business owners we must keep going and putting forth our voice and message. Obviously our strategy will change, and in times of struggle it’s much more difficult to speak in a positive manner (who wants to brag about losses??) but it’s something I’m personally committing to doing no matter what. I will be posting failures and struggles that I have along the way (which I do already) and I will be posting my wins just the same. Falling into obscurity is more costly than bankruptcy.
The time to lead is now
Shallow marketing efforts (influencers and the like) will subside as they will have less cash to funnel to non-operation required expenses. Voices of success in the marketplace will fall, voices of fake success will really fall, and those who are really doing well will rise to the top if they stay consistent.
Investors with the most credibility right now are the ones who came through the 2008 collapse intact. This crash will be the same way, we must survive and keep our voices active so when we come through the other side we can become bigger than ever.
When we come out of this thing and the economy is ready to grow again people will need leaders to show them it’s right to be optimistic about the future. Start becoming that leader now. Don’t just survive, be highly relevant.
Rule #4 Respect the risk
Maybe this will blow over, maybe it won't.
Maybe we should all go on as if it’s business as usual, maybe we shouldn’t.
There is a very valid concern that this event could spiral into economic destruction.
Don't be a hero
The key to consider is that there are more unknowns now than 3 weeks ago, and the world is doing unprecedented things that are worth our attention. It’s very hard to say what will happen, but this event is going to change the world in ways that will never be reversed, and we should take that uncertainty seriously. In light of this, I’m going slow and deliberate and I’m taking no unnecessary risks. I do not intend to live in fear by any means and I don’t want to instill fear in anyone else, in fact my intent is quite the opposite: understanding the possible risk should empower people more than scare them.
One of the few things I know for certain is that most people get in financial trouble because they underestimate the risks they are taking, going slow and staying afloat is better than pretending like this is a non-issue and being wrong. It's the height of arrogance to under appreciate potential risk, and trust me on this one, no one knows arrogance better than me.
Don’t do anything that will have you take on risk of your ruin, respect the risk.
The Lake of Liquidity
I write this mostly for my real estate investors, but it’s still valid insight for all.
Liquidity is the ability for an asset to be easily converted to cash. Cash is the most liquid asset with real estate being the opposite and the most illiquid of all asset classes.
Imagine a perfectly circular lake with a beach surrounding it. The center of the lake is cash and the beaches are real estate.
The last two weeks of the market have been the equivalent of a giant boulder dropping into the center of the lake. The stock market is highly liquid and moves fast, this means traders can make their decisions immediately and response is instant. The stock market is more than just a pool of rich people’s money, it’s more useful as a measurement of human behavior. In the last 2 weeks the DOW has dropped ~8000 points which says investors are abandoning their confidence in the market.
Most regular people have seen zero tangible effect from this behavior, why? The stock market simply does not have a direct daily effect on people's lives because they don’t live off their market balances. This isn’t to say the effect doesn’t exist, it just means there is a delay from when the rock drops, and when we see real world effects.
The boulder has been dropped into the market, but the ripple will hit the beach sometime later. This is incredibly important to think about. In 2007 Fannie Mae went bust, but it wasn't until 2012 when the foreclosures finally stopped, that's a 5 year gap for effects to be felt. This is because it takes a long time for jobs to be lost, then payments to be missed, then evictions, then foreclosures. So the market dropping this week is not the concern but quarterly financials come out in April and July and both are going to be awful. This means layoffs, that means missed payments, which then means less spending, and many people without big cash reserves won’t be able to weather the storm. These effects are going to compound over the next few months creating bigger ripples that will hit the real estate market, for months or even years ahead.
Also remember, at the time of this writing the market is not done dropping yet. Moving on market changes now is a reaction, the response is to get ready for the effects that will come in months ahead.
I didn’t intend to write this part, but I’ve been being asked about it all day so I wanted to provide people some insight.
The Federal Reserve just cut interest rates to effectively zero. This is the highest signal that the fed is worried about the financial impact Corona will have on us, and should not be dismissed easily.
What makes this worrisome is that in 2007 the fed fund rate was at ~6% and they dropped to zero to fight the problem. It worked, but it was still a very difficult time. In our scenario the fed has kept interest rates low for 10 years to stimulate the economy. My opinion is they kept it way too low for way too long in an effort to prop up the market, that’s all fun and games until you need the spread like we do today. The idea is that the fed needs 5 (five) points of drop to combat a recession, but because of our irresponsible behavior the fed only had 1.5 points to drop as stimulus. That might not be enough to get us out of trouble.
The Federal Reserve only uses two tools to guide the economy: Interest rates, and printing money. This week they cut interest rates to zero leaving only one tool left in their arsenal. Although they used as much of an interest rate drop they had available there is a very real possibility that there isn’t enough spread to combat this downturn. In addition to dropping rates they purchased 700 billion in bonds, which has a similar effect to printing money: inflation.
In my opinion inflation is the biggest risk our economy faces, and that has been the case for about ~2 years. We are moving much closer to this risk rather than further away. Unfortunately that is beyond the scope of this article, but keep it in mind for further writings.
So is now a good time to refi? The federal funds rate is the rate that the big banks borrow at, this is not correlated to mortgage rates. Mortgage rates are already super low and unlikely that they can go much lower. From a rate perspective now is a great time to refi, but also know that taking out new debt at this time can be risky if your ability to pay for it is in question. My suggestion is not to stretch on new mortgages right now, and don't think you can’t lose your job, you can. Mortgage rates are low but rate is only one part of understanding how to use debt. Don’t over simplify things.
You want to learn more about this topic and how the economy works? Check these out:
Big Debt Crisis - Ray Dalio
You can get this a free PDF
How the Economy Works - Ray Dalio
Here is a YouTube video for the illiterate. Ray made this in response to the last financial collapse, it’s as relevant as ever.
Incerto - Nassim Taleb
I’ve been promoting Incerto for two years and it’s by far the absolute best resource for how to invest in a world of risk and uncertainty. This is the most important and relevant thing anyone can read and it’s more applicable now than ever. It’s a big commitment, but a valuable one.
This is 5 books: Fooled by Randomness, The Black Swan, Antifragile, The Bed of Procrustes, Skin in the Game
The Courage to Act - Ben Bernanke
Written by the former Federal Reserve Chairman about how they navigated the previous financial collapse. Informative and relevant.
Recession proof real estate investing - Jason Scott
Jay is a smart guy and he was prepared for this event and already wrote the book on how to deal with it. Only mistake he made was not including me when he wrote it.
I do not get any affiliate income for these links, just trying to help.
Hope this helps
This blog was not a comprehensive education on macroeconomics but hopefully it gives readers something new to consider and more than anything GO SLOW. I care far less about my people winning and making sure they just don't lose.
Reach out to me for further questions!