Late to the Party? Seek Higher Ground
here's a behavioral axiom in the investing world that goes back ages and ages.
It's been prevalent since the beginning of time
when people first started to figure out how to invest in something, whatever that might've been. That axiom is FOMO. It's the fear of missing out and we see it over and over again, during every market cycle.
The market always goes through cycles. We have business cycles and market cycles that tend to run in tandem or fairly close. The National Bureau of Economics Research has been following the cycles for well over the last decade, all the way back to the 1800s.
Typically every seven to nine years, we have a business cycle. Sometimes they're shorter and sometimes they're longer like this last period, since the great financial recession of 2008.
We started coming out of it in 2012 and we're now 10 years, well into a decade of an upper run bull market. We've seen the bull market in financial assets. We've seen it in real estate. And just about everything that had any kind of investment grade to it has done relatively well… until it doesn't.
That's when we go into a correction – where the cycle tops out and goes down the other side, typically into some kind of correction or recession that comes in different levels based on how much things have gone up.
With respect to that, I believe that we are heading into a recession. We may be there right now. I'm not going to make an absolute prediction, but I believe that we’re rolling into one. I believe the correction could be relatively deep because we've had such a long run for this bull market.
Back to FOMO, what I see so often and what I’m seeing right now is the “Johnny-Come-Lately’s” – those who are late to the party. They think, “Everybody's having fun. I've been sitting on the sidelines, I've been busy doing other stuff. And just now I'm awakened to the fact that, oh, there's this thing called crypto! Gosh, I should get into crypto or, or the financial markets are doing great. And I should get into the latest XYZ, wherever the current thrill of the market is.”
Or even in real estate, people are making money hand over fist. We've seen the year over year appreciation factor in single family housing on a national basis. It’s well over 20% and people feel like they’ve been missing out – it’s the fear of missing out.
Now, if you have been on the sidelines and you haven't jumped in, let me just give you a little caveat. It's hard to go against the grain here – behavioral psychology is so strong in this regard – But you need to move to higher ground.
What I mean is, if you don't understand what you're doing, if this is new to you, if you're entering a new market (financial, real estate, cryptocurrency, I don't care what it is – whatever you think is hot or has been hot), don't plan on staying there.
The game is moving. The cheese has moved already, and you're getting in late to whatever that is. Whatever the track record has been, whatever the returns have been over the last four to six years, they're going to change. The models change.
People look at real estate all the time and they see it through one lens. “Well, I should go out and buy properties. I can start with single family, or maybe I'll go into multi-family or, if I don't want to be active, I'll get into some hot syndication.” Because there are syndications everywhere. My gosh, you can get into syndications that are promising an internal rate of return of well in excess of 20%. “Boy, I'll get into that one next.”
Now, it's cooling off. It's cooling off rapidly. I'm not saying that there are no opportunities. There's always opportunities. But how do you know, how do you find them when you haven't been in the game?
Tangible assets like real estate and businesses are far different from financial markets. Financial markets, in my opinion, are no place for a retail individual investor to play ball.
Yes, if you want to buy mutual funds or ETFs or index funds, you're buying the market and you get some level of safety. But overall, the financial markets are headed for a very nominal, very mediocre return rate over the next decade. I think that run-up has been had.
Now, could you say the same thing about real estate? Doesn't real estate follow the cycles?
Yes, to some extent, but real estate is an inefficient marketplace. It’s a place where if you're plugged in, if you have access, if you understand due diligence and underwriting, if you've put a little time and effort into it (which is necessary), you can navigate the niches and the voids in the market to still stay on that higher ground.
We do that all the time in real estate. I was having lunch with a good friend of mine who wants to get more involved in real estate investing. He said he was meeting with some friends and some people who have been flipping land close to the interstate where the home builders will come in and buy the land to put their subdivisions in.
In the last two years there has been a frenzy of new home building because people needed homes, the inventory was low, the cost of money was cheap, and people wanted to get out and get more space due to COVID. Made sense, right?
Well, we've topped that out. We're coming down right now. Interest rates are going up. Demand is going down. If you look at home builders' stock prices right now, they've been falling. But there's still many new starts in the marketplace right now. So I told my friend, “Hey, you're coming late to the party. You're getting in late.” He said, “Well, what should I do?” Seek higher ground.
There are great places in real estate to seek that higher ground where you can still be earning good yields, still be in a safe place, and not be at the top of the market in the equity arena – what my friend was planning on doing. You have no business being in the equity arena if you haven't been in the game and you don't know what you're doing. It’s a very dangerous time, but there are places that have that higher ground.
That's what we do – those of us who are plugged in and have access points in a very inefficient marketplace. It's a place where you can preserve your net worth and actually increase your net worth. In fact, we make more money and increase our net worth more when the market is going down than we do when it’s up. You can make money in both ups and downs, but how do you do it in down markets? That's the art of the deal. That's what we do.
I want you to stay focused on your freedom. Don't go for the FOMO. Be so careful right now –
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