There's Nothing Like "The First Time"

We usually remember our first time experiences. My "first time" was in 1993 when, riding in the backseat of someone else's car, it struck me like a lightning bolt: Real estate markets around the country, and here in San Diego, were collapsing just as they had in the early 1980's. And, like the early 80's, banks were gushing red ink. Some even failed. The same real estate cycle that I had observed 9 years earlier was repeating. Sentiment was so negative that so-called "smart money" was dumping all real estate holdings, including foreclosed upon homes, at almost any price. Many large developers went bankrupt, and those who survived were hoping to "stay alive till 95."

As real estate was receding, stock markets were gathering momentum. The same thing that was occurring before my very eyes in 1993, I had observed before in the early 1980's. Thousands of upside down homeowners and speculators were walking away from properties, giving them back to the banks because they owed more than the current values. Because money goes where it's treated best, billions of dollars went flowing into the stock and bond markets lifting prices slowly and steadily. This was a repeatable pattern, providing tremendous opportunities for any forward looking investor. I was a virgin no longer, determined to manage money differently and with little or no emotion.

Like the seasons, everything moves in cycles. In 1942, Harvard economist Joseph Schumpeter wrote that with capitalism we are dealing with an evolutionary process. Like life itself, businesses are always in the process of "industrial mutation...incessantly revolutionizing the economic structure from within, destroying old less effective methods and replacing them with new ones." Back in his day, stock markets, housing markets, recessions and expansions happened with such regularity that they were more or less predictable. If this sounds all too familiar, then I have good news for you: Odds are these cycles will repeat, allowing us to spot the shifts and prosper from them early. To this day, our boom and bust economic cycle rotates through Schumpeter's famous "perennial gale of creative destruction".

"Nothing Recedes Like Excess" Warren Buffett

He's the Paul Bunyan of investing, larger than life with the ability to give away $40 billion dollars and remain a billionaire. Buffett loves buying great companies when they are out of favor, selling them when cycles shift and Wall Street's wheel of fortune turns in his favor. Whether it’s stocks, bonds, real estate, or commodities, he's searching for quality at a discount. Regardless of whether you prefer mutual funds or individual stocks and bonds, buying low and selling high never goes out of fashion.

The average economic cycle lasts approximately 4 to 7 years, and different industry groups thrive or struggle depending on where we are in the cycle. Occasionally, great companies can stumble even during the best of times. If the enterprise is otherwise solid and well capitalized, it grows even stronger from the experience. And, these "recoverable calamities" create wonderful opportunities for bargain hunters, including competitors and investors.

Fallen Angels Focus List

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Disclaimer
The opinions expressed are those of Gabriel Wisdom and Michael Moore and do not necessarily reflect the opinions of American Money Management, LLC (AMM), an SEC registered investment advisor. Clients of AMM, Mr. Wisdom, Mr. Moore and employees of AMM may buy or sell investments mentioned without prior notice. This newsletter should not be considered investment advice. The opinions expressed do not constitute a recommendation to buy or sell securities. Investing involves risks, and you should consult your own investment advisor, attorney, or accountant before investing in anything.