Vera Verba

We are currently seeing predictions that “the economy” will collapse in the next couple of years. Will the once mighty USA (and Europe along with it) soon resemble 3rd World Sink Holes? Will your business and investments go down the tubes?

Or, could it be that this normal, predictable trough in the business cycle is just another time of opportunity?

If the politicians in your country are incredibly corrupt, ideologically misdirected (like Chavez or Mugabe), and also inept (think Africa, Pakistan , Argentina or the Philippines), a country’s economy can indeed sink and stay down — until a regime change. But that scenario is not likely in the USA — nor in Europe.

Why? Because anywhere there is a relatively free economy with only mildly stupid leaders, boom eventually follows bust.

Then too, regardless of the business cycle or political adjustments that occur in any country what happens to your net worth can be the exact opposite of what happens to your country’s economy as a whole.

It all depends what you bet on [or against!].

How well is the USA economy doing? Depends on whom you ask. Talk
to a homebuilder or a banker heavy into bad loans then you’ll probably get a negative answer. But talk with a farmer or an exporter. You’ll get a very upbeat view. The different perceptions are results of the current weak dollar. Far from being a negative, a cheap dollar is one of those self-correcting mechanisms fueling the biggest export boom in decades.

The weak dollar makes American goods and services cheaper. It slows down imports. This, in classic Adam Smith “invisible hand” economics, will reverse the trade imbalance that has plagued the USA. A comeback for the whole economy is almost inevitable. That is why a depressed stock market always jumps back after panic selling fueled by what I call “the doomsday boys.”

So instead of wringing your hands; panicking that civilization as you know it is about to end, just position yourself to be in any business or segment of the stock market that will do well right now or in a comeback. Diversify and make deals that will make money no matter what. Examples? If you can, pick up distressed real estate or discounted but safe junk bonds that will give you a good return; Go ahead. Just do it! Even if there are foreclosures going on all around you, if you bought right and manage your rental property effectively, in a few years you will have made a bundle. We just sold the house we lived in at double what we paid for it a year ago.

They say that the rate of return or growth on real estate is not as good as stocks. But what these “commentators” say is from people who have never been in a real estate deal. They overlook is that if a $1- stock goes up 10%, you have a capital gain of 10%. But if a 100,000 apartment is sold for 110,000, you probably have a profit of 100%. Why? Because typically, real estate is purchased with a 90% loan. The trick is to be able to support your loan payments with rental income. Or , if you live in the house, the loan payments are just like rent. If you bought place for $1,000,000 with 10% down, and it sells for $2,000,000, how much have you made (as a % profit) on the deal? Beats the 5% you’d get at a bank, doesn’t it?

“Everybody” currently thinks the outlook in the USA is very bad. The “doomsday boys” predict that “everything” will get much worse. As a result, those negative expectations have been priced into the stock market. After the “dot-com” bust and before that in 1987, the doomsday boys were fueling already low expectations with talk of a universal meltdown – the coming crash, the next great worldwide depression—blah blah blah.

Those who predict the end of the world are always wrong.

WHY DOOMSDAY PREDICTIONS SELDOM WORK OUT

The “Principle Of Expectations” is a very important concept to understand if you’re going to profit in the investment markets or become a billionaire.

Right now, almost “everyone” expects the United States residential property market to perform badly in the future.

The public sees entire tracts of brand new homes unable to sell.

They wonder how they’ll ever be able to sell their own houses when new ones are not moving.. On television they see sad tales of home owners being evicted & realtors losing their jobs. Most commentators focus on dire predictions of recession, unemployment, and bankruptcy

What they don’t realize is that the “invisible hand” — those self-adjusting mechanisms of capitalism are working just fine. The stock market adjusts to reflect these negative expectations. The companies who did not manage their risks are down –sometimes bankrupt. Others, like Goldman Sachs are highly profitable–paying their top three executives $66 million dollars each for their efforts in 2007. And even in a down market for financials, GS’s stock price is going up…After every bust comes another boom. It is called the business cycle. And within the business cycle, some stocks and businesses are counter-cyclical.

The question here is, “Will the future prove to be better or worse than the market expects right now?”

Have the sheep again over-reacted? Sure! They always do. Will things get better faster than expected?

Sure! The Feds are injecting liquidity into the system, the politicians are making dumb new laws to bail out bankrupt borrowers.

Yet for the moment the price of virtually all junk bonds, homebuilder’s stocks, lenders and stockbrokers reflects a worst-case scenario.

What should YOU do?

You might think about making a bet on the underdogs. Yet to come may be another terrible year or two at the most, but I expect that with a little “cherry picking” you’ll profit a lot sooner than most people think. My Advice? Buy the stock of well managed companies on dips. Expect a recovery.

Nobody becomes a millionaire by watching TV or reading blogs. You have to place some intelligent bets.

I think starting your own business or investing in property directly is better than merely investing in stocks.

When you own/run things you can control the variables. Example?

During the tail end of the great depression in the U.S.A., around 1940, a
relative of mine picked up at a tax sale auction a run down, virtually
abandoned 36 unit apartment building [in a crappy neighborhood] for a total
of $300, “all cash.”..Yes, that is no misprint: Three Hundred Dollars Total.

He personally moved in to the derelict property and rented out apartments for
$30 a month as he fixed them up. This deal was the foundation of what became a
great real estate fortune. When that neighborhood had gentrified 20 years later
in 1960, each apartment was sold by him as a condo unit at around $100,000.

Total value of property: $3,600,000, in 1960.

Had he [or his heirs] held on, those units today , 50 years later, they are now worth six mes as much , or over $700,000 each.

That’s $25 Million on a $300 investment!

And that kind of return is common as dirt — just average.

In Monaco, the Pastore Family did exactly the same thing starting with

nothing in 1938 or thereabouts. They bought distress property with profits from a cement and re-bar business, and then in WW2, built a few apartment buildings.

They never sold much. Today they own, free and clear, about 25,000 apartments, stores, and warehouses each one of which is worth today, on average, 5 million EUROS.

This makes the Pastore family in Monaco worth more than Bill Gates, Warren Buffet, the Walmart Heirs or anyone else in the Fortune Rich List . They are however quaisi PTs, and not well known — nor even on any rich lists.

Monaco as a country is no economic powerhouse. It has virtually no exports. But some people [including myself] are doing very well here, thank you.

There are also many super rich people in 3rd World Countries who are making very serious money today. There are opportunities everywhere. Thus, even if the USA would become less of a free economy & even if much of the economy goes down the drain—even then — not all investors and property owners there would end up losers. Many fortunes are being made in China where democracy, & freedom are scarce and corruption is rife.

Consider Carlos Slim, according to Forbes, now the richest man in the world. The son of a Mexico City shopkeeper he recently built up a staggering $65 billion personal fortune. The Mexican stock market crash was his opportunity to get into a few deals cheaply. In the early 1980s, Mexico was in the depths of a massive financial crisis. It was much worse than the current situation in the USA. Periodically the elder Slim would round up his three teenage sons for an economics lesson. Sitting them down in the living room of the family home, Slim would produce a handwritten list. One line would show, for instance, how a Mexican insurance company was selling for far less than a similar American insurer. Another would show that compared with European candy or cigarette makers, Mexican manufacturers were drastically undervalued. It was time to buy and get into new businesses, not to retrench or buy gold bars.

Moral of this Tale:

Don’t stand around frozen like a deer in headlights.

Think creatively! Move out of danger into profit. Be prepared with your own optimistic vision. Position yourself to get where you want to be.

– Gramps

P.S. I just re-read an article by one of my favorite authors, Richard Bach. [Remember Jonathan Livingston Seagull ? Uno?] He indicated that the best way to end any prediction or story was:

Everything I said may be wrong.