Investment Strategies To Ride Out The Recession

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This post was guest blogged by Alex.

Guessing who will score the next goal is difficult but predicting the leading goal scorer for a team by the end of a season is easy. With this thought in mind, allow me to share with you some macro investment themes that will help you position your portfolio to take advantage of the next economic growth cycle.

IS IT A GOOD TIME TO INVEST?

Historically, the highest returns are made within a day of a major rebound so if you’re not invested for the long haul, you’re at risk of losing that windfall gain. It is important to realize stock markets are not a reflection of the state of the economy. The stock markets are simply an indicator of where investors think the economy will be in 6 to 12 months.

Whether the markets will go up or down from here, no one knows. Just because markets have fallen 50% from their highs doesn’t mean there is value. Take Japan for example. In 1989 their Nikkei index was at 38,915 points. Today, 20 years later, it is only at 7,173. Yes, something was wrong in the late 80’s when a piece of land in Tokyo was valued at more than all the land in California.

P/E (price to earnings) ratios also sell the same story. They look cheap compared to a year ago but take note that the ‘earnings’ part of the ratio is based on 2008 earnings – 2009 will paint a very different picture.

So what positives do markets have going for it? For one, hundreds of billions of dollars from stimulus packages have been rolled out by governments around the world. We will soon see and hear more about their impact on economies.

WHICH SECTORS TO INVEST IN FOR THE NEAR TERM?

In the near term, you want to focus on sectors that will benefit from those government stimulus packages. They all have a common theme to use infrastructure as the key stimuli to create jobs and to increase activity in the economy. These infrastructure projects will include hospitals, schools, water projects, railroads, highways, bridges, ports, airports and energy.

One area highly investable with high growth potential is renewable energy. Over the next few years, solar, wind and hydro energy will see mass global implementation. With government funding on the line, there is a legitimate will to develop these industries.

Railroads will also come back in fashion. Urban light rail in particular will continue to grow and be integrated into national railways. If you have spent some time in Europe or Asia you will almost certainly agree North America has a lot to catch up on in making rail an efficient and popular mass transit solution.

Don’t forget heavy industries and construction firms too. They will be benefiting immensely from government spending on infrastructure projects.

WHERE TO FOCUS FOR THE LONG TERM?

The new fortunes of the future will almost certainly be made in agriculture followed by commodities and real estate. These are the assets that will float up fastest and stay there for the long haul. After the global economic downturn, the world will demand investments with more tangible assets. Obviously this is a macro overview and that local market conditions will differ from region to region. If these sectors are not favorable in your markets or is not feasible, then you can look at investments options tied to these assets through the stock markets. As with any investments, if you bring leverage into the picture by borrowing to fund your investments, then you need to carefully review if the investment still fits your risk profile.

Agriculture will see continued growth for generations to come. As developing countries like China and India with its combined 2.4 billion citizens become powerful consumers, they will demand much more produce and meats for their diets – OK, maybe no meat for India. Global population will also continue to rise and as infrastructure becomes more efficient, crops and livestock will move around more freely to help alleviate regional shortages. For the first time last year, more people in the world live in cities than in rural areas. Urbanization is a growing trend that will benefit the agriculture industry. Agriculture machinery manufacturers and other supporting sub-sectors will be part of this growth story too.

Commodities will climb back. How can commodity prices go down when there is a finite supply? What is more important is that commodities will likely become a storage of true value as inflation begins to rise globally. You should know that many of the governments have printed money not only to provide liquidity to the credit markets (otherwise known as making loans available to those who need it) but it is also to help ‘inflate their way out of debt’. If inflation kicks in, that $10,000 loan made last year will not have the same intrinsic value in the future. It is like buying a home back in 1985 and making monthly payments on it today. It wouldn’t be very much money because the loan value was based on the value at the time of purchase before inflation raised the price of the property and lowered the intrinsic value of the mortgage. By printing more money, governments want to speed this process up so those underwater with mortgage debt can make their payments easier. The trouble with this scenario will be for those who have been prudent with their money and have savings. The value of their savings and certain non-tangible assets like bonds will fall in value dramatically. The point here is that inflation is coming and only commodities will be able to store the true value of your wealth. When rampant inflation does hit the US, the value of the USD will fall and prices of most commodities (which are usually quoted in USD) will have to rise to reflect the true value of the underlying commodity – therefore protecting the value of your investment.

Real estate will return as great reliable income generating investment vehicles. After this economic downturn, people will want to make investments in things they can see, feel and use. No longer the heavy appetite for investment certificates or complex investment instruments. If you think about it, very few investments have the ability to pay you cold hard cash every month with so little risk and so much flexibility. A rental property that has been paid off is like having a self sustaining blog income but without the writing. You could also easily walk into any bank and leverage the property with a mortgage and use the equity to make another investment. These are the attributes that make real estate so expensive. Not the dirt on the ground or the cost of the structure.

You may have noticed by now that I do not provide specific investment picks. It is not what I do. The purpose of this article is to identify macro economic trends that will help you make investment decisions from a position of strength.

In these extraordinary times, it is not important whether or not you’re investment has lost value. In fact, it is highly inevitable unless you’ve long been holding select tangible assets such as gold. When even Warren Buffet and Donald Trump are losing money on deals, you can be forgiven. What IS important is that you peg your money NOW to those assets that will float up faster and higher when the storm ends. Investing is all about stacking as much of the cards in your favor as possible. By knowing and investing around those who will benefit from the government stimulus packages, you will have an advantage. And by investing in tangible assets for the long term, you will become a successful contrarian investor.


47 thoughts on “Investment Strategies To Ride Out The Recession”

  1. Ron C. says:

    Thanks for the post. Recession can be tough times for everyone. We have to learn how to conserve what we have. Smart investments can be a real help in this recession.

    1. I agree right now Cash is King – with that said planting small seeds to fund what may become a forest of money isnt a bad move.

      Only play with what you can throw away at in these times or with hedged bets or very conservative plays.

      1. Tushar says:

        Well said. Cash is king, but you need to start spending that cash slowly or it won’t be worth anything soon enough.

        1. G$ says:

          2 words, depression and deflation.. nuff said,

          This is like last time there will be no recession it’s time for another depression.

      2. The Mad Ape says:

        Cash is trash. It is not back by anything of value. Nixon removed the gold standard in 1971 and since then inflation and instability have been the norm.

        The only real money is gold and silver. It will continue to hold its value long after the US dollar collapses. And it will collapse!

        The Mad Ape

        1. You are so damn right Mad Ape, Gold and Silver are the only true Money. The paper money will depend always in Bad administration of goverments and they can make your money worth nothing but gold value and silver always prevails, they still keep their true value.

  2. good post.

    so your saying that because a company get a piece of the stimulus, its worth investing in? There are so many stipulations behind a a gov’t stimulus that you could end up with a diluted position in a stock.

    having 4 condo rental properties, your statement on rental income being passive as you compare it to a blog income is a little extreme. Its a lot of work, and when you have other things in your life going on, its really stressful having to not only retain long term tenants, but be on the ball in fixing everything and collecting rent on time. Fortunate for my, my tenants are now all excellent, but it was not always like this.

    Personally, real estate has a while to come down, while argi stocks are still stuttering with prices that should come up once oil prices go up. As long as raw materials needed by farmers (equip, gas, land, etc) is cheap, prices are going to remain low. Look at rice, it shot up as oil went up. Its going to be a while before prices from this past summer make appearance again.

    Interesting post!

    1. Tran Harry says:

      I agree with your comment.

      Being a home owner is hard enough as it is. But dealing with tenants who are chronically late on payments. Ask for repairs. And having to worry about whether they will leave and break lease is enough to say managing a blog is much simpler in most cases. To that extent I think the Original post is insightful, but with very little research backing it.

    2. Alex says:

      The companies that receive government funds are not the companies to invest in. The companies that will be participating in government subsidized projects are the ones to invest in. For example, highway construction / operating firms will benefit from the additional tenders that will be offered by the US government in the next few years.

      For my suggestion in real estate investment, I did mention ‘As with any investments, if you bring leverage into the picture by borrowing to fund your investments, then you need to carefully review if the investment still fits your risk profile.’.

      In your case, change the ‘risk profile’ to ‘life style’. if you have 4 properties and you do not wish to manage them then you can hire an agent to do that for you at relatively low fees.

      If your cash flow does not allow you to do that then you may consider selling the property that is generating the lowest return with the least prospect for appreciation. Then use the equity from that, increase it in the other remaining properties so that you can then have the higher cash flow that will allow you to hire someone to manage your real estate portfolio for you.

      It all comes down to tweaking the leverage to suite your lifestyle. With 4 properties, you have the luxury to outsource the grunt work.

      1. Tushar says:

        No offence, but are you trying to suggest that all the other investors in the world haven’t figured out that the companies that being subsidized are going to be making more money?

        They’re already overvalued. Don’t make them even more overvalued.

        1. Alex says:

          No offense taken at all. I’m all for debating and new perspectives.

          Many projects that will benefit from the US stimulus package have not been announced. The companies will not directly receive a subsidy. What this means is that there will be a lot more projects in the pipeline for firms to bid for. They will include everyone from portable toilet providers for construction sites to manufacturers of wind energy blades. The investment opportunities are not only for the design, engineering and construction firms too. Many projects will be offered to investors through public-private partnerships (PPPs). The firms who win these PPP contracts typically will front the money together with the government to build an infrastructure, then have the right to own and operate it for the next 25 years. Imagine the returns for a key toll-bridge or highway. Steady as a heartbeat through good and bad times. Many investment funds offer these exposures while others you will need to be a limited partner in with a large initial investment.

          I just wouldn’t put that much faith in the markets and institutional investors in that they have figured out and have already invested in and inflated all investment opportunities relating to the opportunities that lie ahead. Many of the investors that move markets have been hurt so bad by the limited credit (loans) available to them that there is a lot of value out there right now.

          1. Even if this companies can operate with the new stimulus they still need the people to buy, to move the economy, what happens if the people does not have enough money or not willing to spend much money? These companies will stay in business anyway? Do not think so.
            But to invest if we got the money It seems a good place to make money in the short run before anything happens.

    3. The Mad Ape says:

      The stimulus is like giving crack cocaine to an addict. It gives the addict a temporary fix. All the companies that were going to fail should have been allowed to do so.

      The credit bubble was their own doing.This stimulus will eventually fail because it will devalue the US dollar even more.

      Your house may end up worth in $3,000,000 in paper money but when a loaf of bread costs $50,000 it will all be relative.

      The Mad Ape

      1. Tran Harry says:

        That is one thing that really irks me about the way the current government is trying to set the system up.

        As a person that bought a home their home will go up relative to everything else in the world, and if you happen to own a piece of steak that cost $50 that’s fine, because you own steak, or a HDTV or a PS3. Whatever the product is.

        But for someone who choose to be frugal and save their money for rainy days, it seems that each day they hold out on buying that flat panel tv or whatever they want to get, their purchase power is just being eroded by the fact that inflation is running rampant.

        The only clear explanation I came up with for housing is that it just took inflation to a whole different level, and a saver trying to save $40,000 for a 20% down payment on a house that use to cost $200,000 totally missed their boat because in 5 years that house cost $400,000 and their down payment saved would only be 10% of the purchase price. And for those who wonder why that person didn’t just buy the house when it was $200,000 it was because they didn’t have any money for a down payment and didn’t want to go at it wrong by taking on ARM or interest-only loans.

  3. Tran Harry says:

    I can’t help but read your paragraph about how a rental property is an income tool like a blog. Yet you don’t point out that a property will forever be taxed by the government, and you will need to buy insurance for it. At the moment we are in a buyers market, so don’t expect to be able to pass these costs off to the renter as they will be demanding lower rents or they’ll rent elsewhere. You could be waiting up to a decade for housing to stabilize to where we are even back at equilibrium.

    And to add, any heavy maintenance or repair will easily wipe out any rental gains that were made for the year. A flooded basement alone could take out thousands in earnings if you’re fortunate in getting a positive gain on your rental property.

    And lastly, although most obvious, anyone hoping to get a second property should have the money on hand already for it, any repairs and renovations need to be done with cash on hand, it will take a good few years before banks forget and start issuing easy helocs again against your properties equity.

    1. Although it may be true expenses are sort of assumed. Let’s take for an example a 3 family property: If those 3 apartments rent cover 75% of the mortgage, insurance, utilities you are still increasing your credit and equity. I agree that rental property isn’t to be seen as a large income tool in this economy right now, but in 10-15 years time your property will have paid for itself, and your property value will have risen, your credit would have risen, and your equity would have risen.

      1. But there are better tools to gain wealth, rather than waiting 10-15 years only to have your children possibly take advantage.

        I make fast money every day trading on the market and own property from this income now. I can tell you that with each condo, the insurance, mortgage fees, association fees, maintaining, taxes, I barely walk away with a profit at the end of the month. Hence why I have multiple units now…its hard work for little money. Unless you have patience on your side and money to spend now without seeing immediate results, property game is not for many people out there.

        Also, for most people, 10-15yers is a very unattainable number. Most either fall out of the game because they did not factor in vacant units, or major problems and then get behind on their units and end up short selling their place and people like me take advantage of their mistakes.

        A lot of places property values have fallen so much and are not about to come back for a long time. There is way too much supply with a steady, low demand. I play played in the Toronto, Miami, L.A and Chicago markets now and so far that has been my observation. I have worked with some major property developers who also say the same thing, the market is going to need a lot of time to absorb the current free-fall.

    2. Alex says:

      You’re quite right that your property will be taxed by the government forever but so will you and your children and your children’s children.

      The concerns you’ve brought up are legitimate but many can be solved if you buy a smaller property or properties. They generate higher returns and offer few opportunities for things to breakdown. Yes, the turnover rate will be higher but you diversify your income that way. If you really do not have the time, the higher returns offered by smaller properties should allow you to hire a property manager to find tenants and be point of contact for all breakdowns.

      1. Tran Harry says:

        I can see where you’re coming from, but it is definitely not sound proof investing.

        I have read stories of people with the same mind frame that bought in at the height of the bubble who own 8 properties and are doomed to lose lots of money.

        On the other hand, I see where you are coming from, because if we’re at a bottom or close to the bottom than this is a great time to leverage out into real estate as people will always need shelter and not everyone can purchase.

        But remember that was the assumption before, until the government stepped in and used Fannie and Freddie to help subsidize so that even the poor that normally couldn’t own were able to start owning and decided to hell with renting when I could be owning and building my own equity.

        The problem with equity is that when buying a home at the wrong time, equity is loss if the home loses value, unless you’re buying for the long term than I would say real estate is and always will be a very illiquid asset.

        1. Alex says:

          It’s very true that we may not be at the bottom of the real estate cycle but if you have the ability to buy property outright at this point, your risk is very limited. Rather than buying a larger investment property with a mortgage, just buy a smaller one outright or with a very small leverage.

          If people who bought property at the height last year, they’d only be down about 15%-20% in Vancouver. That is a lot better than having invested in the stock market through the same period. The only reason we hear more noise from real estate investment loses is because people leverage to buy property and can lose money they never had in the first place whereas retail investors rarely borrow at the same level if at all to buy stocks.

          I truly believe if real estate falls another 50% as some pessimists say, your money is not safe anywhere. Not even cash. At least real estate offers you a tangible asset.

          1. Tran Harry says:

            Well actually if it fell 50% than cash is king because that counteracts inflation by causing a deflationary effect on assets, so if you have the money at that point than you can buy a lot more for your money. It is like what Aman said in another comment, it is when the people start to walk away from their long term investments that they’ll sell it cheap and the ones with the money in hand can pick up great deals.

            From a pessimistic point I do believe holding cash is the best option. But that can all go to hell with the way the current administration is handling interest rates, subsidies, and inflation.

    3. Man you make rental property investments looks very bad option.

  4. I was talking to my father the other day about investing in websites now since things are about half the price. But he told me to wait it out for a few more months because things seem to only get worse.

    -Mike

  5. Master Guide says:

    The article shows you did your homework, really nice.

    After this economic downturn, people will want to make investments in things they can see, feel and use

    I was reading a lot about that. The modern world caused a lot of things that are intangible to gain value. Some are related to entertainment so, in crisis a lot of old priorities (that been there a long time) come back more clearly.

    In fact there is an increase of sales of websites these days, just to say something…

  6. Trader Mom says:

    I am a short term trader. I swing trade and day trade stocks. I short the market 70% of the time and I am doing just fine.

      1. The Mad Ape says:

        Eventually any stock or financial instrument denominated by the US Dollar will be worthless paper.

        Investing in gold and silver bullion will get you through the peril that is on the horizon.

        Do not invest in silver or gold ETF’s. You do not own actual bullion. Also take ownership of any bullion you do buy.

        Do not let some company store it for you. Having it in hand will be more secure knowing you have ready access to it.

        The Mad Ape

        1. You mean have tons of gold under your bed? Thats good for a small amount, but what if you have done this for a long time and have some huge amounts, any burglar entry into your home can be your worst nightmare.

          I am not so sure about keeping it with me.

  7. This effect publisher heavily,we are getting less $ then earlier .Hope market will be up soon and every 1 will be happy face again.

  8. information says:

    If you have large volume of backup funds.. then you could innovate on new business that could blend with the current economic crisis.

  9. That great post. Invest is the easy way to make money online.

  10. Interesting piece. I still think real estate needs many more months to start to rebound.

    1. months, more like a year atleast. The days of NINJ loans, or 5% down are gone. That cuts out a lot of buyers and therefore smaller demand for increasing supply. Its going to be a while before we see a flurry of sales on a broad market. Sure, smaller sectors with speculative buying might see sales (Detroit for example with its hi foreclosure rate) but nothing across the board….yet.

  11. The Mad Ape says:

    Be wary of this advice. The economic crisis that we are in is just beginning. The United States is broke because of its addiction to cheap and easy credit.

    It is as simple as this. The whole economy is now propped up by foreign investment in the US dollar, through the US bond market. In particular, the Chinese government holds the majority of this investment because the are a cash-rich nation.

    At some point the Chinese will cut their losses because they will see that their investment in the USA is a money losing venture. When that occurs the total weight of this collapse will be apparent.

    Mark my words. The USA will go bankrupt. Civil unrest will follow. This is not fear-mongering. This is fact. The debt load of the US economy can not be paid back.

    If you want to survive this crisis then you should cash out of all of your stock market investments, T-bills, 401K’s, RRSP and invest it all in silver and gold bullion.

    As Robert Kiyosaki says: “Cash is Trash”.

    The Mad Ape

    1. I second what you just said.

  12. Best post of the year so far!! Thanks!

  13. Pahn says:

    I think this is a big time investment.. it would be more easier to influence people by starting to get back to the basic,, then invest on something small that they believe could kick back big.. because recession just makes a lot of people want to spend things on minimal effect…

    besides, the major needs of people are food, shelter and clothes.. so if they earn that everyday, it will be more effective 😛

  14. TT says:

    “If you’re not inside, then you are outside”!

    By the time there is enough accumulation from the investors out there (dumb money) buying these sector stocks. The market will be short again!

    At the end of the day, the Pro’s on Wall Street will be sippin’ on jin and juice. Laidback!

  15. Great post, now I have a lot to think about. Thanks

  16. Nicholas says:

    This post makes me think and made me realized how to used my money well. It should be invest well after all Cash is king.

  17. But also the stock market is made of feelings and moods. Any real financial problem can be intensified ten fold due to the people who are not real Investor, there are too many stock flipers, they get spooked to easily and make problems bigger than it really are.

  18. If one applies these strategies, one can really combat the mighty recession with ease.

  19. Yeah right! That’s a big and hard idea to decide on. Though its risky, its really a rewarding one. Before you proceed to investment, let me give you some advice about investment!

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