A common adage is “treat your investing as a business”.
Good advice! And at first blush, you might think it means …
- Figuring out your mission, vision, values …
- Establishing clearly defined goals and objectives …
- Developing strategies, tactics, processes, policies and procedures …
- Recruiting, training, and leading a team …
- Setting up communication and accountability rhythms, and processes for evaluating progress and making adjustments
All true. But it’s also very important to pay attention to the economic environment you’re operating in.
A popular business planning tool is SWOT analysis … which stands for Strengths, Weaknesses, Opportunities, Threats.
SWOT helps you make better decisions about where to focus time, attention, and resources.
Most amateur investors focus only on opportunity. They look for it. They chase it. They stretch their limits reaching for it.
And sometimes they end up in dangerous deals by not leveraging their strengths, acknowledging their weaknesses, or recognizing external threats.
In Am I Being Too Subtle?, multi-billionaire real estate investor Sam Zell says a big part of his success is the ability to understand the DOWNSIDE … and still proceed.
Most people ignore threats because they’re a downer. It FEELS better to focus on sunshine. It’s just not smart.
Risk is gloomy. It doesn’t sell seminars, books, or video-courses. And it can chase away an audience.
So investors are under-served by most gurus, media, and pundits because few talk candidly about threats.
Yet it can SAVE YOUR FINANCIAL LIFE. So we do it anyway.
Besides, the flip-side of most risk is opportunity. So when you frame looking at threats as searching for opportunities, it’s not so bad.
Part of SWOT is about assessing the environment you’re operating in.
We divide investing environments into four categories … Micro, Macro, Geo-Political, and Systemic.
Micro factors include …
- The property, parties to the transaction; financing, etc.
- The neighborhood, local economy; local laws, taxes, customs, etc.
- The local team … property manager, on-site staff, etc.
Micro factors are where most investors start and finish … because micro factors are easiest to see and handle along the shortest path to getting the deal done.
Macro factors include …
- Interest rates and factors which drive them
- Federal taxes and laws
- Policies affecting job creation, living costs, real wages, consumer and business confidence
- Economic factors affecting energy, materials and commodities costs, currency strength, etc.
Sure … this is some heady stuff …
And if you’re only going to play small and VERY conservatively, maybe not worth all the effort to watch and interpret macro factors.
Then again … many small investors got killed when the Tax Reform Act of 1987 changed the tax treatment of rental properties.
They probably wish they’d been more aware and prepared. When things are changing, a “wait and see” approach can be painful.
But if you plan to play big … and especially if you’re going to raise money from private investors … you’ll definitely want to invest in your macro education.
Remember … the 2008 crisis which crushed many unprepared investors started at the macro level … before crashing down on the micro level.
Most micro-players (including us), didn’t see the storm forming at the macro level until the monsoon hit. Bad scene.
So … how much advance notice do YOU want when something major is lurking on the horizon? More is probably better.
Geo-Political factors include …
- Currency and trade wars
- Oil and energy policies
- International treaties (trade, land-use, etc.)
Most people hear about geo-political factors in the news all the time … but don’t consider or understand their impact on Main Street micro-investing.
Systemic factors include …
- The financial system … currency, banking, bond market, etc.
- The environment … energy, climate, water, etc.
We think systemic factors just might be the BIGGEST threat most investors aren’t paying any attention to.
Yes, it’s a lot to consider. And maybe you doubt it really matters to your daily real estate investing.
That’s what we thought … before 2008.
Then we found out the VERY hard way these things DO affect Main Street investing … so thinking about them isn’t just for wonky paper asset pundits.
Let’s look at some recent headlines … how they might affect our Main Street investing … and let’s just focus on oil …
Is The Oil Industry Repeating A Critical Error – Oilprice.com 7/14/18
“ … Wall Street has been subsidizing the consumption of oil on Main Street.”
“… the punishing price decline in oil from 2014 to 2016 … resulted in deep cuts in exploration and development throughout the industry …”
“… there isn’t an oil price … both low enough to avoid economic stagnation … yet high enough … to prevent a decline in the overall rate of production worldwide.”
Let’s break it down …
Energy is essential to economic activity. No energy, no growth. Restricted energy, restricted growth. Expensive energy, expensive growth. You get the idea.
Energy is a key input into the cost of EVERYTHING. When subsidies mask rising costs, economic numbers look better than they really are.
Remember … a strong economy is NOT the same thing as a strong financial system.
Investors make mistakes when they deploy capital based on false readings or temporary circumstances.
Remember what happened to real estate investors who flocked to North Dakota because of the oil boom … a boom only possible because of high oil prices.
When oil prices crashed, so did the North Dakota real estate boom. Investors only watching micro-factors … and even macro-factors … didn’t see it coming.
Whether it was Saudi Arabia attacking U.S. frackers … or the U.S. directing an economic assault on Russia’s oil revenue … oil prices fell because of what was happening at the geo-political level.
So today, knowing oil prices affect economic growth, consider these recent headlines …
- Trump asks Saudi Arabia to increase oil production – CNN Money, 6/30/18
It takes cheap energy to grow an economy fast. And with the Fed raising interest rates, Trump’s using tax cuts and cheap energy to goose the economy.
He’s got to out-run ballooning deficits and rising interest costs. Cheap energy … even if only temporary … buys some time.
But cheap energy doesn’t fund the exploration necessary to replace oil being consumed. Very few people on financial TV talk about this.
That’s why we hang out with brainiac Chris Martenson. He’s a fun guy … a positive guy … but he’s a realist. It’s sobering. Brutal facts can be that way.
At some point, supply and demand take over and prices rise … slowing or reversing economic growth, driving up costs, and probably bankrupting marginal businesses.
Many billions in oil industry debt could go bad. Remember when sub-prime mortgage debt went bad?
The financial system today is rife with counter-party risk, so bad debt can spread like wildfire through credit markets.
We’re not saying it’s going to happen, but we’re watching. If something starts to break, we want to see it sooner rather than later.
Of course, we’re also watching oil, like gold, for its role in currency wars. We remain convinced the dollar will be a major story in the next ten years… or less.
A little spooky. But pulling the sheets over our heads doesn’t make it go away.
The good news is there are smart people watching all this … and thinking deeply about what it all means.
These are voices mainstream sunshine-sellers don’t promote. It’s bad for ratings.
But we put together nearly 14 hours of presentations and panels with all the big brains from our Future of Money and Wealth conference …
So if you missed the live event, you can still see and hear what everyone has to say. Click here to learn more.
Smart business people and investors practice SWOT… and invest in growing their education and network … so they can make better, faster investing decisions … in ANY economic environment.
Until next time … good investing!
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