Monday, November 13, 2006

Up, up and away...

(A stairway in San Diego, California. Click on image to enlarge.)

Any investor who didn't take a big hit in the dot.com bust several years ago might have developed the misguided notion that things, like the tidily ascending flower pots in the photograph above, will continue to chug along nicely in a never-ending climb towards financial nirvana and riches for everyone.

That would be extremely unlikely.

Why?

First of all, everything tends to work in cycles. What goes up must come down, hopefully not as far down as it started in the case of share prices, real estate values or precious metals prices, but never does anything go up, up, up forever. Except, of course government spending and the egos of fools, but those are perhaps subjects for future posts.

Real estate prices, for example, are certainly much higher than when I bought my first home in 1972, but the prices didn't ascend in a neat and tidy straight line. There were dips along the way, some lasting only a few months, some lasting several years. It's the dips that will get you, if you aren't careful.

Most investments are cyclical. Some individuals will see undervalued assets and smell opportunity and future profit. Others see what is happening, and in true copycat mode, will pile on the trend. Soon, the competition for the now not-so-undervalued assets, drives up prices. At some point, the assets become overvalued, but the followers still keep buying. The trend has now been up for such a long time, and that is all they know, so they project continued success into the future and buy, buy, buy. And, often, they borrow to buy, because after paying for their upscale lifestyle, there is no cash left over.

The smart individuals see that things are now overpriced, and sell. The followers do what they do best, and follow suit. The assets go down in price, sometimes dramatically. The people who bought on the way up, and were smart enough to get out at or near the top, did well. The people who, as sheeple usually do, piled on when everyone was touting the 'can't lose' opportunity to get rich, didn't do so well. That is the way of life. Those who follow the herd often get hurt.

The real estate bust has taken hold in many parts of the United States. People I talk to there all tell me the same story. In Canada, at least where I live, things are still booming with real estate, but here too that will come to an end. Then, there will be a period of adjustment as the system purges itself of excesses, and the cycle will start all over again.

I remember, years ago, while watching my son and other rug-rats play a soccer game, a youngish soccer mom was telling me about all the money she and her husband were making on share purchases of technology and software companies related to the internet boom. I wonder how they fared when that market tanked. For every Yahoo and Amazon and Google, there are dozens of companies who burn through their IPO funding, have little or no revenue, and predictably, crash and burn. Investors get hurt.

I won't tell you how much money I have lost on speculative investments on internet and natural resource companies (notably gold and silver exploration companies) over the years. The trick is to:
  • Never invest with money you can't afford to lose.
  • Never put all your eggs in one basket. Diversify.
  • Invest the bulk of what you have available in safe investments and only a small part in riskier, speculative investments.
  • Before you invest at all, pay off your debts.
  • When you do invest, don't borrow to invest unless you really know what you're doing. Borrowing to invest is called leverage, and while it can help you get much higher returns if you are lucky or knowledgeable, it can also break you and cause you to lose everything you have.
I have always tried to follow these rules. If you do too, the good investments will outnumber the bad and you will do well.

I have no idea why I felt compelled to write about money today, but what I see around me and what I read and see in the media, scares the bejeebers out of me. People blissfully sail along like there will never again be another bad economy. But there will be. Take my word for it. It might not happen tomorrow, or even next year, but it will come as it always does, and it makes sense to be prepared.

If you are financially sophisticated, this won't be of much help to you, but if you are a financial novice and want to learn a little bit about money and investments, I wrote an e-book on the subject years ago, and you can download it for free (no registration, no salesman will call, no strings, no obligations, no bull) here: The Success Primer.

Download the file, then double-click on it to install. Read at your leisure. The text displays in my company's proprietary ebook software (Windows only, no Linux or Mac versions available, sorry!) and the e-book can be un-installed at any time.

Good luck.

7 comments:

  1. I am a sucker for colored flower pots...and money...ugh.

    Perhaps I should have talked to you before buying 2 acres of Belizean jungle.

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  2. Jen: I am presuming that you are serious (not like buying Louisiana swamp land) about your Belize purchase. That is something else altogether from what I was talking about in my post. Retirees are looking for places to go that are safe, less regulated, cheaper to live, etc., and Belize fits the bill on all counts. You should do OK there. I am developing a residential community in Panama foor those same reasons: see www.rocamilagro.com if you are curious.

    Good luck with Belize!

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  3. I love the flower pots! I dl your e-book, last night, but I haven't had a chance to read it. I'm going to take a crack at it inbetween propositional logic, truth tables and axioms and theorems of the probability calculus.

    I'm hoping it is a more interesting, slightly lighter read.

    I love that you offer us your invaluable insight into things, Atavist. Thank-you.

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  4. Penny, thank you for your kind words. And, just reading the titles of the subjects you are studying gives me a headache. You're right, the ebook will be easier reading than those texts of yours.

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  5. Is this photo by any chance from the Mercado in Old Town?? It sure looks like somewhere I've been (lived in San Diego for 20 years)!

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  6. Yep. That's it, Les. I was intrigued by the area in general and by the interesting patterns of the flower pots at this specific location.

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  7. Hello,

    I recently published an article on mortgage loans, tips on how to make them work for you and other forms of mortgage financials – here is a quote from it, in case you are interested:

    Smell a Good Deal for a Real Estate – Try to discover a property that has already got some equity in it, when you purchase it. Equity represents the value of a real estate, a property after you have paid any mortgage or other charges relating to it.

    Try to Get a Second Mortgage on the Real Estate – You could try to be more creative and ask the seller whether he would be willing to have a second mortgage on that home. Thus you could set up an agreement with the seller through which you will have to pay monthly an approximate sum of $200, for instance, on $15,000 of the price of the real estate (plus or including the interest rate), for the second mortgage.

    Save Some Money to Pay in Advance – Some lenders might give you a full credit if you come with at least a small percentage of the sum. This would grant you supplementary points for getting the credit and would also lower the interest rate – e key point of any mortgage refinance program.

    Don’t Give up, Go Further – don’t trust the first broker who tells you that there is no hope for you. You will finally find someone who could offer a viable solution, just keep asking and searching. An alternative is to apply online to mortgage services. Thus your application would be seen by more lenders and you might get more offers to analyze your solvency.

    Improve Your Present Credit Score – by not applying to credit cards, auto loans or other loans, if possible. Too many inquiries would also affect credit scores. Another important thing you should do to improve your credit scores is to acquit your current duties and payments on time.

    If you feel this helps, please drop by my website for additional information, such as how to refinance a second mortgage or additional resources on mortgage rates.

    Regards,

    Michael

    ReplyDelete