Warren Buffett has one simple rule for investing in a downturn . . . zig when others zag. And right now, investors are zigging towards overvalued stocks and high-risk gold.
Since the start of the COVID-19-induced downturn, novice investors – armed with stimulus checks and free time from lockdowns – have been rushing to the stock market by the millions.
Online brokerages like Charles Schwab, TD Ameritrade, E*TRADE, and Interactive Brokers all saw record new sign-ups numbering in the millions. Millennial-favored Robinhood, which offers free trading, saw a historic 3 million new accounts in the first four months of 2020.
“Be Fearful When Others Are Greedy and Greedy When Others Are Fearful.” –Warren Buffett
Right now, investors are greedy for the stock market. Newbie investors have been snapping up stocks at a feverish pace, often without discretion or discipline – even picking up high-risk penny stocks and stocks of bankrupt companies.
The result has been an overvalued stock market currently trading at nearly twice its historical average price/earnings (PE) ratio.
The stock market is due for a big correction. So while others have been greedy, Warren Buffett has been fearful of this market – sidelining over $100 billion in cash instead of putting it in the market.
Where some investors see only pitfalls in downturns, others see opportunity. While Warren Buffett sidelines his cash to buck the stock market trend, other investors are bucking the trend in more active ways.
These investors know how to make money in downturns and when the economy recovers, they’ll reap the rewards from the investments they make now.
To get rich during a downturn, follow the smart money – not the self-professed smart money on CNBC but the real smart money.
One of the principal lessons we can learn from the smart is to not shrink or sit on the sidelines during a downturn. Invest with confidence but don’t invest in just anything. Have a sound strategy and know where to put your money.
Where does the smart money put their money in a downturn? The same place they always put it, they just double down in a downturn because there are bargains to be found. And the one place they turn to even more during a downturn is to commercial real estate.
They have a sound strategy for making money from commercial real estate in any economic environment – but especially in a downturn.
The guiding principles of this strategy are:
- Seek Diversified Cash Flow.
- Seek Assets With Intrinsic Value.
- Think Long-Term.
DIVERSIFIED CASH FLOW –
Passive investments in cash-flowing assets across a range of geographic locations, asset classes, price points, property types, and conditions ensure recession-proof cash flow now and in the future where a decline in cash flow from one property in a downturn can be compensated with the cash flow from performing properties.
Buying stocks in a downturn, especially now when prices are overvalued, you may wait years to make any money from those stocks as they stabilize and their prices move beyond their current overvalued prices.
Investments in assets that rely on appreciation for profits – if there are profits – means zero cash flow while you hold that asset and no significant profit until you sell it many years down the road.
Alternatively, if with a passive commercial real estate asset, you can be enjoying cash flow immediately. No matter how severe a recession, people are always going to need shelter and places to work, eat, and play.
Diversified cash flow streams will ensure consistent reliable income through a recession as well as a recovery.
SEEK ASSETS WITH INTRINSIC VALUE –
Assets with intrinsic value are tangible and have implicit value separate from what investors are willing to pay on the market for them.
Cash flowing real estate derives its intrinsic value from rental income. Over time, rents increase because of rising demand due to population growth – apart from inflation. This is the intrinsic value of commercial real estate and what contributes to appreciation over time.
Stocks have no intrinsic value. They have no value separate from what people are willing to pay for them at any given time. They don’t generate income and they’re not tangible. That is the critical risk that comes with investing in stocks. It’s the potential that your investment goes to zero without any tangible asset backing it.
Real estate, on the other hand, affords investors a level of protection stocks don’t. Even in a liquidation, unlike with stocks, there are typically assets remaining to distribute to passive investors. This is the value of the tangibility of commercial real estate.
THINK LONG-TERM –
Passive commercial real estate investments are illiquid. They have lockup periods of a minimum of 5-7 years. It’s this liquidity that prevents investors in these assets from panicking in a downturn where investors head for the exit and induce extreme volatility in the markets.
Commercial real estate has a low correlation to the broader markets because of illiquidity. Investors are prevented from cashing out and triggering runs on the market.
The cyclical nature of the economy means that downturns are inevitable. But there’s no need to shrink in the face of disaster.
There are opportunities to get rich. You just know where to look and what to look for.
For smart investors, commercial real estate has long been a reliable source of wealth in any environment. Just remember to think long-term and to seek diversified cash flow from assets with intrinsic value.