Liquidity is an illusion.
When you have money, it’s hard to find anything to buy that has real value. When you don’t have money, you are surrounded by incredible opportunities that you can’t pursue.
That was the theme of Ethan Penner’s speech at the last Atlas 400 meeting.
Ethan is credited with being the primary driver in the creation of the Commercial Mortgage-Backed Securities market. He’s also been named one of the most influential people in the real estate world.
To say that Ethan knows what he is talking about is an understatement. And that’s why it was so valuable to listen to everything he had to say about liquidity being an illusion.
The concept is quite simple. Just save money to buy things when they are cheap.
But, in practice almost nobody can execute this idea, including major fund managers. We get caught up in emotion, we follow the crowd, and we lose perspective of the bigger picture.
As an investor, you want to buy low, sell high – and repeat that process as often as possible. That’s how you create compounding returns that grow throughout your life.Stock Market
Today this is incredibly obvious. Stocks and indexes are reaching historical highs almost everyday – everything is expensive!
In addition, lots of people have money to spend. They have taken equity loans out from their highly valued homes, they’ve borrowed money from banks with extremely low rates, and investors are buying stocks on margin because brokerages are willing to lend.
This cheap and easy money is allowing everyone to buy stocks – which has made most markets very expensive.
What’s going to happen when the next market decline comes?
Who’s going to have money to buy stocks when they are cheap?
Maybe you will, if you have any dry powder.Real Estate
San Francisco, New York, Los Angeles, Shanghai, Sydney, Vancouver, and almost every major city in the world is expensive.
Housing prices have been driven up by easy money.
Now, some of these markets (like Vancouver) are beginning to show cracks… which begs the question of who will have cash (liquidity) to buy up real estate when it becomes cheap?Your Local Bar
Ever go to a bar for ‘happy hour?’
The drinks are cheap, the bar is half full, and the bartender is ready to fill your glass in a second.
Now, what is that same bar like at 10pm?
The bar is packed. There is nowhere to sit, people are stepping on your feet, the drinks are expensive, and you can’t get the attention of the bartender if your life depended on it.
It’s a stretch of a comparison, but I find it odd that people flock into crowded bars for poor service and expensive drinks. They could’ve showed up earlier for happy hour.
The reason for this is because of human nature. We all want to be in the herd with everyone else. It makes us feel comfortable and safe.
Unfortunately, this strategy does not work in the investing world. When we follow the crowd, we lose the ability to stay liquid for opportunities.
So, I encourage you to look around and take an honest view of what is going on. Is there value? Should you be buying? Or should you just be sitting patiently and waiting for your opportunity?
Just like soldiers in the battle field… keep your powder dry and be prepared to act when everyone else can’t.
Thank you for your incredible work Cody! So much learned from your articles and so much yet to examine! Wish there`s a stop/play trigger for a time, so we could learn everything. Thanks again, what you are doing, is so d*mn valuable for people who interested in knowledge! The MVP Cody, good luck on your way!
You have any good ideas on where to park cash/keep dry powder while we wait on things to get cheap again?