Preserving Your Capital During a Correction

that I bring you the cautions of investing in today’s market, the value of understanding a full market cycle, and what is yet to come for our economy.

Why is it Necessary to be Connected Today?

Part of why I am this plugged in is because it's my job. But it is also something I love to do. I enjoy being connected and well-informed. I have always been curious in my life and have wanted to know for myself like many of you. But I’ve come to realize that we only have so much time to gather up all the information on different subjects that we're interested in.

That’s why I plug myself into the right communities with the right people. This folds time for me and allows me to gain insight into the economy and the markets faster than if I did all the digging myself. Of course, I don’t take anything at face value. I weigh it all against what I know and have experience. I hope you do too. 

Networking/building relationships is one of the foundational principles to accelerating your goals. Whether it's through challenges or new opportunities it has allowed me, earlier than most, to leave my original career and have more freedom of time. I am not grinding the wheel over and over again making as much income as possible for some potential distant future.

I tell you this because I want you to know how I came to my following conclusions.

The Media is Selling Us a False Narrative

The narrative and conversations being showcased in the general media regarding the broad financial markets and the economy are at odds with the reality that is playing out on the ground.

The broad financial markets include Wall Street, alternative investments like real estate, crypto, tech stocks, precious metals, you name it.

Today, in the middle of September, the third quarter of 2023, there is a narrative that is overly optimistic about the economy and the markets.

That narrative has been pushed out since and during COVID. We came out of COVID with all the stimulus money that the Federal Reserve pumped out. Congress seemingly came to the rescue. I'm not saying that there didn’t need to be some rescue, but what was done was overblown and inefficient.

In many cases, money went to people who didn't need it. Now we have this overblown economy based on hot-air fiat currency. Now, the chickens are coming home to roost. The money train is slowing down and running out of fuel.

We have debt that's spiraling out of control. We have a Congress that is spending like drunken sailors. This can not continue.

I have been speaking about a correction/recession for some time. Some people have called me out on that. “Well, David, you'll get it right sometime. A clock is right twice a day.” 

I don’t mind because I'd rather cut my potential long-term losses than try to eke out a final bull run market gain that people are so proud of. It would be great if you could do that but everybody agrees that nobody can time the market exactly. So I'd rather be safe and take higher ground sooner. 

This narrative pushed out by the general media has caused much complacency. Many are saying, “There's a lot of room left to run in this market.” 

Regarding the real estate market specifically, I've been saying for many quarters since last year, to stay away and pull your money out of equities (ownership). Whether you like short-term rentals, rental properties, strip malls, commercial, multifamily, self-storage, mobile home park communities, retail, office, industrial, hotel, tourism, you name it. I am not investing in any equities right now. 

I don't care about the potentially great deal that is available. In most cases, you're investing money at the top of a market that's only going to come down in valuation.

Will Interest Rates Go Up or Down?

People are expecting interest rates to come down. “The Fed will reverse course and it will get better.” It won’t.

We have an inflation problem fueled by the continued high government spending. All the while, The Fed says they will get (and keep) inflation down. But this means they have to keep interest rates higher for longer.

They might even push the rates higher than they are now and we are only beginning to see the lag effect of increasing interest rates as fast as they did in the last 18 months. We've never seen interest rates go up this fast before. The damage has already been done. It just has not been felt or witnessed yet.

That's what people don't understand. “They've raised interest rates this high and the economy is still good. People are still buying and traveling.” 

I'm not a fear-monger. I'm not a doom-and-gloomer. But the narrative that many are believing is false. And I understand the desire to want to believe it. But it will not play out the way they think. 

What Should Investors Do?

If you're new to the game of investing, I would be very cautious, especially in real estate and other alternative investments. Even if you’re attending real estate conferences and educating yourself, you are too late to the game.

Beware that many operators both on Wall Street and in real estate have a vested interest in investors buying the narrative. There are many who have built business models that depend upon investors continuing to buy investment products. 

I'm not saying there aren’t opportunities out there at all or you shouldn't seek the education. But if I were you, I'd hold off. I would not jump in with both feet into real estate investing like a lot of people want you to do.

Many people use recent successes as proof that it will keep being successful. “We have a syndication with an IRR internal rate of return that we’ll recap and refinance out in 24 months or 32 months. And you'll get an equity multiple of 1.7 or 2.2, and your IRR is going to be 18 to 22%.” This recency bias is dangerous for investors. Ask them what they are basing their numbers on. Are they counting on interest rates decreasing soon? I wouldn’t.

These kinds of operators have to keep capital moving in the syndication because their compensation is based on fees whenever an investor invests money. That’s why they keep pushing you to give more money.

This isn’t a problem when the market is going up and interest rates are low. The syndicators make good money, which is good as long as the investors make money as well. But, as an investor, you are being put in a backseat position in comparison to the syndicator.

Syndicators ride on your capital and write PPMs that ensure they receive their money even if you don’t receive yours. This works out for everybody until times get hard. 

And we are in hard times.

If you don't know what you're doing or want to make sure you do know what you’re doing, you need to find somebody who has been through a full cycle and navigated it successfully. 

You might not know what questions to ask. You might just be buying into the FOMO. But you don't know what is behind their closed doors. I'm not talking about fraud or corruption. That’s a whole different area. I'm talking about people who are selling you a deal because they need the commission off of your capital investment. Whether it works out or not, they make money. You, as an investor, may or may not make money.

Do you want to put your hard-earned money into something with that much of a potential negative downturn? I don't.

Full Cycle Investing is the Answer

Now, I realize you haven't been through as many cycles as I have. Many of you were in your first upcycle as an investor after the 2008 Great Financial Crisis. You might have invested money in stocks, bonds, mutual funds, 401ks, and some of you even in real estate. And that's wonderful.

I applaud you for jumping in and learning, but most do not understand that there is a full cycle to every market. And we are heading into a down cycle. The same pursuit of investment education during the upcycle is even more important now to successfully complete a full cycle of whatever you invest in.

Some, on the other hand, have gone through a full cycle, yet have forgotten the dangers of what it brings. A down cycle is here. There will be a correction and the longer the cycle goes up, the harder and more pronounced the cycle change will be. Just think of the Roaring 20s (1920s) and what followed soon after, the Great Depression. There is precedence.

Why would you want to ride that down?

Because you're impatient? Admittedly, we are all impatient. None of us want to hold out and feel like we're missing out on what everybody else is doing.

But, if you want to not lose money, and you desire to take advantage of the investment opportunities on the other side of this correction, you must be disciplined. You have to be contrarian. Do what others don’t: Listen. Learn. Talk to people. Seek opportunities very judiciously about how and when you invest your money. 

This is the way I lead my community. I don't sell them real estate. I don't sell anything. What I do is create and cultivate a protected environment where they can come, curate the best information, the best potential opportunities and know how to move their money throughout the full cycle. 

Do not be distracted by what everybody else is doing or has done.