Thriving in difficult times

How do you like change? Change is not all that popular, is it?

Most of us would prefer a predictable future in terms of our job security, for our businesses and for our investments. But currently we are experiencing a time of change and unfortunately these are all subject to the whims of the markets and the economy and therefore are unpredictable.

Successful investors not only adapt to change; they exploit it.

While the majority of Australians will sit on the sidelines feeling sorry for themselves, successful investors are looking for and buying investment opportunities created by the change. That’s right, some people will thrive not just survive in these difficult times.

While this may seem hard to believe given the amount of negative news bombarding us in the media, the truth is fortunes are always made in times of change.

Over the next few years the gap between the rich and the average Australian is going to widen. It’s not because the rich will somehow be luckier than everyone else, it’s because they will be able to weather the economic storms better than most because they are financially fluent (they understand how money works).

What have you learnt from the world economic crisis?

If we have learnt anything from the recent years of economic crisis, it’s that life will always provide you with challenges and obstacles to overcome. One of the big differences between successful investors and the average person is that successful people see these obstacles or setbacks as opportunities to grow and learn from, rather than insurmountable problems or personal failures. They persist through them, seeing them as challenges to overcome and strengthen their conviction as they move forward.

There’s no denying that the world’s economic crisis is currently creating issues and glitches for our nation and our own personal finances. And this is unlikely to change in the short-term.

We’re experiencing a weakening of market confidence, a hiccup for our economy and a downturn in our property markets, but just like the GFC a few years ago, this is just part of the economic cycle and does not mean the end of capitalism or bankruptcy for Australia.

The problem is that the media loves to play on our fears and keeps feeding us a slanted view with a bias towards the bad.

I remember reading and hearing similar doom and gloom prognostications in the early 70s, during the recession of the early 80s, in the late 80s after the stock market crash and again in the early 90s during the recession we had to have.

They said that the less than perfect financial situation back then spelt the end of capitalism, the “end of the world” and that our property markets would collapse. In fact similar things were said in the early 2000s and again only three years ago when the GCF hit.

It didn’t happen then and it’s not going to happen now.

Let’s face it: the financial world around us is in turmoil. The news is full of stories of recession overseas, companies going bankrupt and even countries failing to pay their debts.

There’s no denying that things are probably going to get worse before they get better.

Don’t get me wrong; I’m not suggesting this because I’m a fearful person or because I think negatively… I’m not and I don’t. I understand and firmly believe that all progress comes from change. I believe destruction allows for creation – oftentimes of something bigger and better (if I didn’t subscribe to this theory I wouldn’t be a very good property developer would I?) It’s part of the economic cycle.

This is a time for cleaning up the excesses of the past and getting our financial houses in order to move on to the next stage of the economic cycle, which is the recovery phase.

Things are never as bad as they seem

I’ve found that when things are bad people believe they’re going to be bad forever and when things are good people forget the bad times ever existed and think that things are going to remain good forever.

Neither case is true!

In fact during booms people are most confident when they should probably be the least confident, as things can’t continue travelling at breakneck speed and above average rates of growth. Similarly, during less prosperous times, things have to eventually turn around. Ironically, people have the least confidence when it’s more likely that things are going to improve… that is, when markets are near their lowest point.

When prices of properties boomed, the way they did a few years ago, the charge is often led by people who have no real idea about what was going on or what they were doing. They saw something good and wanted to go along for the ride. In reality, the frenzied craze to make big bucks that coincides with a boom means we’re setting ourselves up for the inevitable fall.

Conversely, when fear makes property values drop significantly below their intrinsic value, we’re unwittingly setting the stage for the next upturn.

I realise times are tough and you may be having a difficult ride at the moment. But the fact is, this is the right time to educate yourself and get set to take advantage of the opportunities this stage of the cycle presents. Remember that when things are bad they’re never as bad as they seem and when they’re good they’re never as good as they seem. And in reality, it’s primarily human nature that dictates economic and/or market booms and busts.

The tale of two vendors

Yes, the world’s financial markets are currently having a difficult time, but that doesn’t mean you as an individual, your business or your investment business can’t still prosper. Nothing illustrates this better than a story I heard many years ago about two friends, John and Phillip. They both lived in the same town and owned and operated hotdog stands on different corners in the middle of the busy CBD.

John’s hotdog business was going gangbusters. He stood by his stand and yelled to people walking past, “Buy a hotdog! Get your hotdogs here!” and sure enough, people bought his hotdogs. In fact, they bought so many hotdogs that he increased his order for sausages and buns and eventually had to buy a bigger cart so he could serve more customers.

One weekend his son, who was an economic student at university, told him, “Dad, don’t you watch television or read the papers? Don’t you know the world is in a recession and we’re having an economic meltdown? People are losing their jobs; we’re having the worst financial crisis we’ve had since the great depression.”

John thought, “My son is smart, he goes to university, he knows all about economics, I guess he knows what he’s talking about.”

So John reduced his order for sausages and buns and went back to using his old smaller stand. He stopped yelling out to people to buy his hotdogs, because surely they couldn’t afford them anymore and wouldn’t be interested. Not surprisingly, his sales dropped dramatically and the next weekend when John caught up with his son he said, “You’re right; we certainly are having a serious recession.”

In the meantime Phillip, who owned the hotdog stand across the other side of town, and didn’t have a son who went to university, and didn’t bother reading the papers (and was blissfully ignorant of the recession or hard times people were experiencing), just kept buying more and more sausages and buns. He kept promoting his hotdogs to the passers by and not surprisingly, his hotdog business continued to grow bigger and bigger.

So what am I doing now, in these confusing economic times?

Well, I’m continuing to invest the same way I’ve always done. I’m still looking for investment opportunities while others are sitting on the sidelines.

I’m looking at buying more properties below their intrinsic value, so that if values fall further, I’m still protected. By the way, I only buy properties in areas that have outperformed the averages in the long-term and properties to which I can add value through renovations or redevelopment so that I can create my own capital growth.

I’m currently involved in two property developments where I am manufacturing capital growth at a time of minimal capital growth. Then I’m keeping these properties as long-term investments because I’ve acquired them at “wholesale”.

Yes, some investors will thrive, not just survive in these changing times.

Michael Yardney is the director of Metropole Property Investment Strategists , a best-selling author and one of Australia’s leading experts in wealth creation through property. He also writes the Property Investment Update blog.