Over the years, I’ve learned that I am not a stock market investor. I’m also not a real estate investor. Although I do like dividend growth stocks, index funds, and rental properties, I do not have an unrelenting affinity for any of those investments. The same applies to U.S. dollars, bonds, and just about any other type of investment out there.
At the end of the day, I am a financial independence investor. I will utilize whatever means that I can to help me to get to early financial freedom quickly.
I don’t mean to make things any more complicated than necessary…
The Then and Now
They say that history doesn’t repeat itself but it merely rhymes. I don’t necessarily agree with that statement… As I’ve observed over the course of my life, people seldom learn from their mistakes. Although future events will never mirror what happened in the past exactly, for most intents and purposes, they are a close enough resemblance for any investor to exploit.
7 years ago, the world witnessed a market crash of epic proportions. Fear was paramount, and no one was investing. Since that time, the markets have staged a roaring rally, with the S&P 500 up over 200% since bottoming out in March of 2009.
Ditto for most other stocks and real estate.
Times are good again, and the participants of the game today are just as greedy (or more so) than ever before.
Is anyone even remotely concerned with another market crash?!? We should be. We have reached unprecedented heights in a very short period of time, and if you dig through the data, it should be quite evident that there isn’t any REAL recovery going on in the world. The entire globe is in turmoil right now — Greece, China, Puerto Rico, Venezuela, Brazil, Japan, etc…
Bank holidays, bail-ins, negative interest rates, more austerity, Chinese government interventions to keep markets from collapsing, hyperinflation, etc. are NOT signs of economic growth and prosperity!
This is happening NOW in Venezuela:
As usual, many people will choose to remain oblivious to world news and won’t care one iota until they themselves start to get affected directly.
So what if the Chinese stock market fell over 30% in less than one month? The S&P 500, Dow Jones, and Nasdaq are still hugging all-time highs! I’m filthy rich!!! (sarcasm)
Who cares about the “stupid” Chinese farmer who lost his family’s life savings gambling it away in the stock market while utilizing margin (sarcasm):
That could never happen to me, right? I’m too smart!!! (sarcasm)
Fortunately, there are those who DO care! And anyone who is paying attention right now may be able to profit massively from the chaos in the near future.
With U.S. stocks, currently, the Shiller PE Ratio sits at: 26.72, while historically, it should be closer to 16.
That’s an easy indicator showing us that overall market valuations are indeed stretched.
Likewise for rental properties. Locally, The Bay Area Housing Affordability Index (HAI) has dipped to precipitously low levels that ought to trigger alarm bells to any prospective investors:
Housing is very much a local phenomenon, and the above won’t hold true for every market out there. But expensive real estate can be found across many locations: NYC, D.C., Seattle, Canada, Australia, Singapore, etc.
But so many investors just don’t care. It’s business as usual… BUY, BUY, BUY!!!
As an investor who is extremely motivated to “buy low and sell high“, I can assure you that I have learned to pay very close attention to just exactly where we are in a given market cycle. For the most part, I do believe that markets are merely a function of waves, oscillating back and forth, from lows to highs.
Right now, almost all indicators are telling me that the mainstream markets are too frothy!
But that won’t persist indefinitely. The tide will turn again… It always does.
In the meanwhile, I’ve learned to become a student of history. Not only do I follow the broader stock market, but these days, I’ve also tuned in to the commodities sector as well.
In my spare time, I analyze and plot charts. Lots of charts.
To keep things extremely simple, I will borrow some surface-level charts from Macrotrends.
Here is a chart showing the oscillations from 4 major investments (real estate, stocks, gold, and oil) over the past 20 years:
As you can observe, each investment has had its time in both the sun and the doghouse.
If you were an investor back in 1999, you should have been able to CLEARLY see how overvalued the stock market was relative to other assets:
Had you purchased shares of the Nasdaq at the top way back when, you would have had to wait from March 10, 2000 until June 18, 2015 to break even on your investment! That’s 15 years you would have been in the RED!
I realize that it’s impossible to call and time market tops and bottoms, but it doesn’t take much effort at all to glance at a chart and realize in which direction things are moving…
Quite frankly, you don’t even need to catch the exact peaks and valleys, either… You just want to be headed in the right direction.
An investor who would have realized that the stock market was in bubble territory back in 1999-2000, could have decided to swap out of stocks and into a more undervalued asset, such as gold.
From 2000 until 2011, gold went on a tear, up ~500%, easily outperforming stocks and bonds.
Again, it isn’t necessary to time the cycle perfectly… Whether you sold out of gold when it was up 200%, or 300%, or if you were lucky 500% (at the top), in all cases, you would have been much better off than had you stayed fully invested in stocks and bonds.
How would you know when to get out of gold? When the cycle starts to reverse itself, of course:
Anyone who would have had the intuition to get out of gold around 2011-2012, and could see that real estate was an EXTREMELY UNDERVALUED asset would have made a fortune by swapping out of gold and into real estate.
You don’t need a lot of skill… But if you can see the developing trends unfold, you can set yourself up to create generational wealth.
So far, I’ve only participated in one wealth cycle (the bull run up from 2009-present), and in just that time span alone, I was able to become a net worth millionaire.
What did I do correctly? Well, I didn’t have the knowledge or education that I do now, but I was at the right place at the right time (dumb luck). I poured all my money into real estate (repeatedly) and made more in a few years than I ever would have expected to in a lifetime.
Who needs “slow and steady” if you understand valuations and know when an asset is truly undervalued? That’s when you should be buying hand over fist and backing the truck up, as investors so often claim that they will do when opportunity comes knocking. In my experience, opportunity really only bangs on the door when there is blood in the streets and despair in the air.
Though I should caution readers — Even when you are “backing the truck up”, it’s ALWAYS prudent to invest with caution and to not take any undue risks that you are not comfortable with. Regardless of what you decide to do, ALWAYS have a plan in place to limit your downside and protect your overall portfolio! Investing is NEVER risk-free!
What About Today?
Looking back in time with the benefit of hindsight is easy to do. So, what can be done today?
Well, if we look at trends yet again, we will find the following now:
This time, I don’t have the benefit of hindsight to aid me…
What do I see?
As mentioned earlier, I see the broader stock markets as overvalued… Further, although the above chart shows real estate as relatively affordable, I have to again keep in mind that real estate is very local. In other words, you can’t take any chart at face value and you must know what it is that you are looking at. As it pertains to my own situation, this chart definitely would NOT apply to the Bay Area. In my own opinion, Bay Area real estate is just as overvalued (if not more so) than the general stock market!
In any case, when I observe the following chart above, I can conclude that oil and gold are entering oversold and undervalued territory.
WTI crude is now trading under $50 a barrel, and as many are aware, oil and energy companies have been absolutely battered this year. Blue chip stocks such as Exxon Mobil are down ~20% year-to-year.
From Google Finance:
As for gold, I am becoming increasingly certain that the final capitulation is in the air. Gold is currently trading below $1,100/oz and many analysts are predicting for sub $1,000/oz prices before year’s end. Gold is down almost 50% since peaking at $1,923/oz back in April 2011. The mainstream media has started to unleash an onslaught, attacking gold as nothing more than a pet rock and predicting an even further decline down to $350/oz!
Suddenly, gold’s status as money (after 6000 years) is in jeopardy! It’s like kicking a man when he’s already down on the ground… When the shorts come piling on in full force (even after a brutal 4 year bear market), I know that the bottom is near…
Further, the NYSE ARCA GOLD BUGS INDEX (HUI) is down over 70% in the last 5 years:
For both oil and gold, the worst is probably still to come…
But the trends are encouraging for the contrarian investor. 🙂
As always, I should be explicitly clear — I am NOT a financial adviser and am not in the position to advise anyone on how to invest their own money. Please consult with a certified professional if you have any questions, or want investment guidance.
Markets go up and down all the time. You will always have your bulls and your bears. In my view, the beauty of it all is that different assets don’t always move in tandem with one another. So, even if the local real estate market is booming (like it is today in the Bay Area), you can still search across different asset classes, like oil and gold, to find heavily discounted valuations.
Because of falling prices, I am heavily fixated on oil and gold right now; I’m trying my best to be a patient investor as I watch events unfold. At some point, though, we will reach a final bottom where the upside becomes tremendous, and any remaining downside, minimal.
And those are exactly the type of investments that I want to get into. Because after all, I am a financial independence investor! I don’t invest in stocks or real estate exclusively.
I believe in market cycles.
In 2012, I hopped aboard the real estate train. I didn’t get in at the absolute bottom, but it didn’t matter; prices were dirt cheap… There was a ton of upside and hardly any remaining downside.
By getting in the right assets at the right time, I catapulted my early FI progress and was able to eclipse my first $1MM.
You don’t have to be that smart or bright to make money. I’m definitely not.
Luckily for you and me, the masses keep on making the same mistakes. Over and over again. History just keeps repeating itself. And when the next collapse inevitably arrives, there will again be doom and gloom in the air. When the dust settles, I’m hoping to take advantage of the disaster so that I can turn my $1MM into $2MM.
Then we’ll do this same song and dance all over yet again…