Warnings from a Full Cycle Investor

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et's talk about market cycles.

  If you've been alive in the real world for any period of time, you're aware that we always go through various business and market cycles. 

We go through periods of time where the market seems to be solid for business and investments in the stock market, Wall Street, real estate, and other asset classes. The trend is good. Good returns. High profitability. High employment. 

Then we reach a tipping point and the market typically cycles back down. A recession or some kind of correction is often seen as a time when the excess that the up market cycle created is flushed out. Well, we’ve certainly seen this excess in the last 10-12 years. The last downturn (the last flushing out) we had was the great financial recession of 2008 to about the 2012 period.

During that period of time there was a great re-flushing out and a big turn in the cycle – recession, unemployment, people going out of business, the stock market fell, real estate assets took a decrease in asset values, and then slowly but surely we started on an upward trend.

There's lots of things that fueled the last 10 to 12 years. I won’t go into those in this blog today, but there were a lot of things that fueled what we have experienced. A lot of people, unfortunately, falsely believe that whatever gains they had in business, in their wealth production, or in their investment assets (whether they're on the stock market side or real estate side), were all their own doing. No doubt about it, you have to do something to start the wheels turning, but to a great extent, a lot of the wins were because of the market, not what an individual did. 

People who have only seen one side of the market, usually an upside, think that this will go on forever. They think they are immune to anything going wrong because their hands are made of gold. Anything they seem to touch does well. We've seen that in the dental industry with the practice models that have been created inducing private equity and DSO groups to pay larger multiples for practices. We’ve seen the stock market have great wins over the last 10-12 years. We've also seen on the real estate side, something I'm very well versed in, have the same thing. 

These are bubbles and eventually bubbles pop. How you navigate the bubbles is really what's going to set you apart as a full-cycle investor or business owner. How you navigate bubbles will determine whether you continue to be “successful” or take that deep dive that sets so many people back by 6-10 years. You don’t want to have to recover from a big hit where you lose businesses or assets, and have to dip into savings or 401ks to save the day. 

Stock market values typically go down 40-50% in these big corrections. Yes, they eventually cycle back up because that's what a cycle does, but the problem is how much time do you have to wait for the cycle to bring you back up to at least break even?

When you take a 50% loss in an asset class of any kind, you've got to have a 100% increase in the valuation to bring you back to even. That takes a number of years. 

Now, if you're young in life (in your thirties or forties) you can withstand some of that because you're still gonna be productive, ideally, for probably another 15-25 years. You can catch up. This is not something you want to program yourself to have to do on a regular basis but when you're younger, you can absorb some of those downturns if you weren't savvy enough or didn't have enough experience to know how to navigate the corrections.

If you're older in life (fifties to sixties) you don't want to have to restart and rebuild half of your assets just when you’re at a point in time where you think the grass is greener, and you can start to take your foot off the pedal. But that happens over and over again in every cycle.

I've been through a number of these cycles and when I was younger I watched older dentists retire at the top of the market, thinking all was good. Then within a year or 18 months, the market goes through a big correction. Now they're back looking for a job or have to restart their practice.

The market goes through full cycles, therefore, we have to understand how to be a full-cycle entrepreneur, business owner, and investor. Most people under 45 years old probably haven't gone through a full cycle. I'm not saying that you're not smart. You are intelligent to do what you've done, but what I’m saying is do you understand what a full cycle looks like? Have you experienced going through uncharted waters with your business or investments?

What I see a lot today from my dental colleagues are those who have ridden this upmarket – maybe they've made a lot of money with certain stocks, their 401(k)s look good on paper, they’ve thrown money into crypto. I'm not going to judge that right now, but they’re thinking it’s the holy grail. Since the first of the year, as we potentially head into a recession, we’ve seen an increase in inflation, the Fed having to attack it – it’s a different time right now, and we are definitely going into a correction. 

I believe a relatively deep correction. I think we could see something similar to what we had in 2008. That's not going to be pretty for a lot of people. You need to understand how to protect your downside risk, both in business and in your investment categories. It’s so important but most people don't know what they don’t know. They’ve just been throwing money out there and thinking it was all their doing, that they can just keep making money hand over fist.

I know young doctors who are very propitious in being on their frontier. And I love that. They build their practice model and put money into things that have worked for them so far, but you’ve got to be careful about things that have worked so far. For example, there's people in dentistry who bought a lot of rental properties as a way to create wealth. I can understand because I did the same thing when I was younger. That's how I got started. I was buying assets, real assets that would, over time, pay down the debt and produce the passive income that I didn't have to work for. That's a good thing. 

But I see doctors that are so exuberant about the false equity (meaning the market created the equity, not them). The market has created some amazing false equity in the real estate markets over the last two years especially due to all the stimulus money. These doctors bought houses three or four years ago, and worked hard to manage them and fix them up, putting their noses to the grindstone. Then these equities blew up over the last year or two. Now they've got all this equity and I see some of them saying, “Hey, I'm able to refinance, pull out that equity tax-free.” (It's not really tax-free, it's tax deferred. You've always got to pay the Piper. Be ready for that surprise down the road.) The biggest problem, however, is pulling this equity out that doesn’t have a real basis. Some of it does, but most of it was just built up over the financialization of the markets by the Fed and the cheap interest rates.

These young people don't understand that. They think this is how the world is; You build assets, suck the equity back out “tax free” and use the extra money to spend, live off of, and elevate your lifestyle. If you're really smart, you go out and put it in other investments, but you're investing off of debt.

Now, debt is an important part of growing wealth, but to be that irrationally exuberant about the debt you pull out when the money's cheap and hot with credit wide open, is a big mistake. It’s a mistake because they haven't seen the other side of the coin. 

I'm just warning people to be careful, to understand how to go through the correction and navigate uncharted waters. For many of them who have never seen this, it’s going to be an unpleasant story. They'll survive, but it's not going to be pretty. It could end up in divorces and things falling apart and I hate to see that. 

My advice is to understand what you have today; yes you've worked hard for it, but BE CAREFUL in how you put it out in the marketplace. Don’t think that everything you do will be “successful” just because of your recent “successes”. Some of that success has to do with you, but a lot of it has to do with the false pretenses that allowed the markets to go up.

We're in a correction now. If you can weather this storm without major disruption, you'll do fine. If the applecart gets upset, depending upon where you are in your life, career, and age, it’s going to have a lot to do with how you finish out your career, and the end of life years that you have. My point is be very, very careful.

There are many self-proclaimed genius investors today thinking everything they touch turns to gold. But they’re about to learn the hard way what others have gained through “expensive” experience. I’m offering a free report on how to become a full-cycle investor who knows how to preserve and grow capital in Up and Down markets. Will you be prepared when an inevitable recession hits? Get your free copy here.

To your freedom!

David

P.S. Whenever you’re ready, here are some other ways I can help fast track you to your Freedom goal (you’re closer than you think) :

1. Schedule a Call with My Team:

If you’d like to replace your active practice income with passive investment income within 2-3 years, and you have at least $1M in available capital (can include residential/practice equity or practice sale), then schedule a call with my team. If it looks like there is a mutual fit, you’ll have the opportunity to attend one of our upcoming member events as a guest. www.freedomfounders.com/schedule

2. Become a Full-Cycle Investor:

There are many self-proclaimed genius investors today who think everything they touch turns to gold. But they’re about to learn the hard way what others have gained through “expensive” experience. I’m offering a free report on how to become a full-cycle investor, who knows how to preserve and grow capital in Up and Down markets. Will you be prepared when the inevitable recession hits? Get your free report here.

3. Get Your Free Retirement Scorecard:

Benchmark your retirement and wealth-building against hundreds of other practice professionals, and get personalized feedback on your biggest opportunities and leverage points. Click here to take the 3 minute assessment and get your scorecard.

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