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Market Choices | Liquidity vs. Stability

What do you do when the market goes upside down?

I was asked a question this week from someone who is not invested in the Stock Market or the Real Estate Market.

The question was, “What are you going to do when the market crashes?”

My question and reply was, “When ‘what’ market crashes?”

His reply was, “The market is crashing right now!”

Yes, the stock market has lost around 20%, but that has nothing to do with the real estate market.

Fluctuations in the stock market have a great risk on individual jobs before fluctuations in real estate.

The stability of the real estate market is ‘sought after’ by even insurance companies who are currently buying and building huge rental projects to keep in their portfolio to hedge against downturns.

Even Big Banks Believe in Real Estate

You can walk into your local branch of Bank of America and borrow money against real estate. If you ask to borrow money to buy Bank of America stock, they will refuse you. This means that Bank of America has more confidence in real estate than they do in Bank of America.

Full disclosure I’m just picking on Bank of America, Wells Fargo is worse.

But Jimmy Buffett invested in Wells Fargo!

Wrong Buffett, you should be thinking Warren —Jimmy is the 5 o’clock somewhere Margaritaville Buffett.

Warren Buffett invests in Wells Fargo! Warren has so much capital to put to work he cannot invest in any small, local markets. Being an Individual Passive Investor competing against Warren Buffett’s billions is hazardous to your portfolio’s health.


The best argument I’ve ever heard for investing in the stock market is liquidity, that you can get your money out whenever you need it.

There is a two-fold problem with liquidity in Stock Market Investing.

First, by human nature, we need the money when scarcity hits, which is about two days after a downturn, and so that liquidity ends up costing your portfolio a great deal. If the stock market loses 20% and you pull $800 out, you only spent $800, but it cost you $1,000.

Fighting against our human nature, by operating rationally in a Market downturn, by not pulling back, is a major emotional undertaking.

Secondly, there are rare birds called Activist Investors (Billionaires) or people controlling billion-dollar funds, who actively go after individual stocks. I contend they have a vested interest in watching the market drop. They make their biggest gains in market swings.

These Activist Investors are feared by CEO's of large companies. Many will take a large stock position in companies just to force them into what the Active Investor considers better market behavior.

In my view, Liquidity is majorly overrated, and is likely the biggest risk to the average investor’s portfolio.

Stability / Illiquidity

Illiquidity maybe the biggest advantage to the small investor.

First, Illiquidity causes an inability to act quickly so Activist Investors (Billionaires) do not have the ability to move the market in 10% to 20% short-term swings.

Even though the Real Estate Market is reported nationally, it is often perceived to be very similar to the Stock Market. Real Estate Markets act differently in every local market.

What happens in New York City, and what happens in Boca Raton, Florida, and what happens in La Crosse, Wisconsin are three completely different things.

In the greatest real estate crash this world has ever seen in 2008, some markets never receded. This is the result of Illiquidity in the real estate marketplace. Even though Real Estate may drop in price, everyone has to live somewhere, so a disruption in one part of the market causes an influx of demand in another.

How Do You Survive A Real Estate Market Downturn?

The good news is no matter what local real estate market you’re in, you can survive any downturn by cash flowing the property. What does this mean it means that on a 10 to 15-year cycle all real estate gains value. Most real estate downturns last less than five years and so if your monthly rents are higher PITI (principal interest taxes and insurance) your equity will be intact. The LTV of your real estate investment is the biggest influence on whether you can weather the storm.

Rents Go UP

A critical benefit of real estate is in a major real estate downturn, rents actually increase as people begin to lose their homes. They move from ownership to renting.

Other benefits of real estate as an investment, is the fact that you have a physical, insurable asset that has a real value. You can act upon and make improvements that influence its value. You have less liquidity but you have more control of value.

Investors Holding Stock Paper Now Have “Paper” Paper!

A stock investment is a piece of paper that beyond liquidity you have no control over. When Sears, Shopko, Payless, Toys R Us, and many other retailers folded, the investors who were holding the stock paper now had “paper” paper!

What to do in the next Real Estate downturn

As previously noted, on average rents go up in a downturn as the price of real estate goes down in many local markets. So, the best thing to do in a downturn is to buy at a discount and then rent.

The simple answer is, in some context, we are looking for the next downturn. We are not rooting for it but understand... we’re prepared for it. When it comes, we will be ready. Our coveted private investors will be some of the biggest benefactors of the next downturn as well.

Are you looking for more stability?

If you were looking for more stability and still want a good rate of return, we may be able to help.

First and foremost, please don’t sell your stock market position at a loss to change investments!

If your tired of listening to the news as your portfolio recedes, we pay a higher rate of return for investor capital tied to real estate insured by title insurance and hazard insurance.

We have a great team and we have 90-day, 180-day, 270-day and 360-day opportunities.

If you’d like a one-on-one consultation to see what we could do together, please feel free to reach out to me on my cell phone at 608-306-1199.

Just a note, a conversation is never tied to an obligation.

— Joshua Dudgeon

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