Six of one… - Posted by Eric C
Posted by Eric C on June 19, 2001 at 15:07:23:
… or a half-dozen of the other.
I agree with the concept of cycles. What I really meant was two things:
-
That cycles happen more often and with more volatility than most people realize or expect. This trend to more and more volatility is going to grow over the next few years. A lot.
-
What happens (or is happening) with the general economy or even your local economy may not be that important. You can be in the midst of a meltdown and be making money hand over fist. Or, you can be surrounded with glowing economic numbers and be drowning.
The underlying reason for both of these is the same (in my opinion) – poor math skills.
We are all caught in widespread trends that are sweeping us along whether we like or not (or whether we realize it or not). Securitization is such trend.
Securitization is basically sold as a risk management technique that is a more sophisticated version of the older participation agreements that S&L’s used years ago. The idea is simple.
Pass the risk off to as many parties as possible. Recover your investment as quickly as possible. Repeat this process as often as possible.
Nothing wrong with that, right?
Well, not unless you get it wrong to begin with. Bad risks aren’t really made any less risky because they can be securitized. The process may spread the pain a bit, but it doesn’t change the reality of the offering.
And what if securitization becomes unavailable, even temporarily? That’s happened before as recently as 1998 when Criimi Mae filed for bankruptcy on Oct 5. With no one to lay their risk off to, commercial lenders began to withdraw loan commitments, increase interest rates, and ask for additional collateral (up to 25% more). And, at the same time, commercial property values fell between 15 and 20 percent IN A SIX WEEK PERIOD. Potential buyers could not find loans.
OK, so that’s just one example of a widesprend trend leading to an economic problem (and I could give you plenty more), but what about those of a more personal nature?
How about illness for a start? As Mike Gerber likes to say, are you working on your business? Or in it?
Most investors are pretty much one man shows. That’s just the way they’re wired. And that can lead to problems.
I had a friend who was an independant sales guy. I mean this man was making about 2-3 million a year from home. And this was before personal computers and the Internet. The telephone was his weapon of choice.
He sold his product around the world. He was very successful until he had a stroke at the age of 46. The stroke left him unable to speak. He could think. He could understand. He could not talk. And his business went out the door. He didn’t go broke, but he came very, very close.
Or how about the man in Texas who had sold hundreds of homes on land contracts (CFDs) and who found himself on the front page of the local paper one evening. Despite doing nothing wrong, most (if not all) of his buyers decided (after the article) that they should sue him.
How would like to have NO rental payments coming in on about 100 houses? And a judge telling you that you will have to continue to make those underlying payments anyway? It got worse.
If you deal with private investors, you can be derailed by the smallest things. That’s not a problem if you are prepared to deal with those small speed bumps, but if you’re not…heaven help you.
People often think that they can stay in control when things first go haywire. My experience is that very few can. Too much of the time, bad can go to worse in a heartbeat.
I can’t control the future. And I can’t predict it either. But I can conduct planning sessions that include most of the possible scenarios (and some that aren’t so likely)and see what would happen under those circumstances. Try it sometime, you might be surprised.
I buy wholesale. I sell (when I sell) at retail. The spread is not only my profit, but it’s also a safety factor. It’s there for a reason. I want to make sure I have the funds and skills to play the game whatever rule changes or global trends might unfold.
Oh, and I buy a lot of property at 50 cents on the dollar even now. I guess those folks I buy from weren’t planning on a fifty percent decline either.
Take care,
Eric C
PS - Some of you may not believe this, but I’ve always made more money in slow (down) times than in good ones.
And about scenario planning. Shoot for four concepts. One ain’t worth the trouble. Two is too few. Three just leads you to average out your conclusions - no help there. Four is just about right.
Check out some books on risk or game theory. It’ll help. I promise.