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Surfing
Financial Cycles And Trends To Success
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| May 2007 |
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| Recently,
as I sat on the beach enjoying the warm southern California sun watching
the surfers play in the waves, I began thinking how much surfing seems
related to financial investing. The surfer, after paddling into the water,
sits on his or her board and begins to study the waves coming in from the
ocean. Knowing the large waves come in sets, the surfer is soon paddling
down the face of a building wave. Once up on the board, the surfer surfs
back and forth using the energy of the wave to maximize their potential.
Then, as the wave begins to lose its energy, the surfer glides over the
top and quickly paddles back out to catch the next big wave. Successful
investing is in many ways very similar. It all comes down to understanding
how investment waves work, which ones to catch, when to catch them, and
when to get off. |
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| This article
is the third in a series aimed at providing thoughtful perspectives on
protecting one's self when it comes to investing and retiring either at
home or abroad. The information is not designed to advocate investment
strategies but provide educational information designed to assist readers
in better understanding the financial world and making good decisions. |
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| The following discussion
will explore two important aspects of investing and long-term financial
success. First, the topic of financial cycles will be discussed using
a historical perspective as a method of understanding how markets operate
in cycles rather than in a linear fashion. The discussion will then
move on to understanding current and future trends and how they can be
used as a tool for positioning ourselves to succeed financially in the
future. Finally the article will briefly reflect on the current cycles
and trends and how they may affect us going forward. |
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| The Importance of Understanding
Cycles |
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| The importance of understanding
cycles can not be understated for the typical investor. If you asked
the average investor, "what were the investment cycles of the past 50
years?" few if any would be able tell you. Our educational system
doesn’t teach this important information just as it often fails
to prepare any of its students for the real financial world. In fact,
much of the economic education we receive presents us with a linear view
of the investment world. We are taught to believe that if we just
keep investing "for the long-term" that in the end all will be fine
and our portfolios will have been fruitful and multiplied. |
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| This mantra, designed and marketed
by Wall Street and its brokers is great for assuring profits for themselves
in good and bad times, but is it true for the average investor on the street? |
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| It is my hope that in the following
pages this article will help you understand how the market is not linear
but is in fact very cyclic. That the market is much like the seasons of
the year with seasons of growth (Bull) and seasons of loss (Bear).
It is by understanding the market as a cyclic entity that the investor
can then act proactively to maximize and protect their financial nest egg.
Much like the surfer who knows how to use the energy of the wave to maximize
their ride and exit so as to not be crashed onto the shore. It is also
important to remember that each of us have our own investment cycles as
it relates to our life cycle. The following example will offer a scenario
to explain why it is so important to understand cycles from both perspectives. |
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| Let's say we have two investors,
Bob and Sue. It is the early 1960's and Bob in his early 60's is
about to retire. Sue on the other hand is in her twenties and just getting
started. As you can see each is in different part of their life-cycles
and investment cycles. In the 60's the Stock Market had been on a long-term
bull. The market had climbed consistently since the end of the 1940's and
things were looking good. Thus it probably made sense for both to trust
their investment would be safe in the market. Little did they realize in
1966 the country would enter a bear market that would last until the early
1980's. Although this may have been disheartening to Sue it would have
been devastating for Bob who was now retired and watching his portfolio
crash. That is if they stayed "in the market for the long-term".
The reality is this same scenario replayed itself around 1929, 1966, and
even 2000 although some might think this isn't the case as the market is
now over 13,000. The question is the market's value compared to what? For
a great discussion please check out this link. http://goldsilver.com/the_dow_is_crashing.php |
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| By studying the markets from a historical
perspective there seems to be about a 17 year cycle where particular strategies
or investment classes will rise or fall. In the 50's to mid 60's
stocks were king. From the 60's to early 1980's commodities became king
and stocks tanked. In the late 70's and through the 80's the Nikkei became
king as commodities crashed. Then from the 80's through 2000 the Stock
Market became king again. As you can see, understanding these cycles can
greatly help you in maximizing investment returns. It can also help you
to avoid being on the wrong side of a particular investment cycle as it
relates to your life cycle. This is really important if you're just about
to retire and reinvesting for the long-term may not be possible. An interesting
note here is looking at Sue as an investor. She started in a bull
stock market, survived a long a bear stock market, rejoiced in the biggest
stock market balloon in history and watched it crash again just prior to
her retirement years. Now that's a cycle. |
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| Understanding Cyclic Downturns |
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| It is important to make a point
about the nature of cyclic downturns and the common belief they are fast
and hard. An event similar to a crash of 29 or a black Tuesday of the 1980's. |
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| The reality is Bear Markets tend
to be long in duration with many deceptive upturns and downturns. This
misunderstanding has led many an investor to stay in the market longer
than they should have as it seemed (and they were told) the market
had finally bottomed and was bouncing back. The bear market from 1966 to
1976 is a perfect example of a time when many investors stayed in stocks
believing a bottom had been set and a new Bull was about to begin. Many
investors lost 60% or more of their portfolio as they rode the bear all
the way to the bottom. The commodities market of the early 1980's is the
same. |
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| Although there is a great deal more
to discuss about cycles this brief introduction will help start you begin
an interesting path of study as you do your own due diligence. We will
now move from discussing how historical cycles can help you in understanding
the ebb and flows of investing to the study of trends as a way of projecting
what may occur in the future as it pertains to your financial portfolio.
This isn't consult your psychic type of stuff, but a simple way to look
at current and future facts and assessing what their effects will be on
the financial world in the years ahead. |
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| Trends |
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| A trend is basically a movement
in a general direction over time. Of course there are trends in style,
habits and all kinds of things. The trends we will be exploring are those
macro trends that will affect us as investors as well as people. By seriously
researching, studying and contemplating our current status socially, geopolitically,
economically, environmentally, and demographically all of us have the potential
to understand what will probably occur in the future and then position
ourselves to best succeed and prosper. And remember, even in bad times
many opportunities exist for those with the foresight to understand these
cycles and strategically position themselves to benefit. |
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| Here is an example. Lets say we
have the opportunity to buy a large tract of land just outside a quickly
growing city where projected development will reach the land in a matter
of a few years. We see that the trend in growth and development will make
this land very valuable so we position ourselves to benefit by buying the
property and holding it until the right moment. As you can see, the study
of trends can be a very important part of your financial decision making
process and isn't that difficult with a bit of common sense. |
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| Trends Are Your Friends... Maybe |
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| Even though the understanding of
trends is important, it is not something many of do as part of our regular
investment planning. When was the last time your financial advisor
discussed the impact of peak oil on your portfolio? Or how the retiring
of the Baby Boomers will affect stocks, bonds and real estate? Over
the past few years I have posed similar questions to friends and family
and found few have thought about such issues. Even fewer have ever
had their financial advisors or brokers broach the topic. Generally,
people rely on recent history in projecting forward their investment strategies.
Having read the above section on cycles you can see how this might not
be the best strategy. |
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| This time it is Different! |
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| Most of us are familiar with the
old saying, usually offered up at the top of a bubble, that this time it
will be different. We heard it in 2000 with the Tech bubble when
people said the stock markets would continue to rise a 20% a year for years
into the future because "this time it is different". Again,
we heard this in 2005 with the housing bubble. The following discussion
on trends will be presented under the caveat that this time it really is
different. Each of the trends covered below are very different as
we have never faced these issues in the history of mankind. We have
never faced a world with 6.5 soon to be 9 billion people. We have never
faced living with the truly finite resources of a small world with a huge
population. |
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| We have never faced a world addicted
to and dependent on an energy source that has peaked where demand will
quickly outpace supply. We have never faced global warming or the ecosystem
collapses we are now experiencing. And we have never faced a world
in which our lives are dependent on a fragile global network where the
failure of one link in this daisy chain can result in millions of people
dying. As investors, and members of the web of life currently hurling through
space on this little planet of ours, it is important to fully understand
that things are really different this time. Unlike in the past (with
the exception of nuclear war) this is the first time in history that
our actions will affect both the planet and the lives of our children's
children. |
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| The following trends are best described
as macro in nature. Meaning they are very large scale and will impact the
world not just for years but decades. By understanding these trends you
can plan for the future both in making good investments and in protecting
yourself and family. Many investors make the mistake of looking at trends
over the short-term losing sight of the more powerful macro trends. A perfect
example are those who purchased gold and silver early in this bull run.
After watching the daily ups and downs many sold in fear as soon as the
market jumped way up or way down. The daily, weekly or monthly volatility
drove them crazy. By understanding the larger trends and looking at long-term
charts, others saw the volatility for what it was and have continued to
ride the metals bull to its current high. The moral of the story is to
keep a focus on the big picture. So lets' look at a number of important
trends. |
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| Population v. Resources |
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| For the first time in the history
of mankind, and the planet for that matter, the human population has literally
increased to the point where it threatens all life on earth. We have reached,
or are about to reach, the sustainable carrying capacity of our species
on the planet. At least in the manner and rate in which we are now using
and depleting these resources. |
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| Understanding and acting on this
trend will be one of the most important investment actions a person can
make in the future. It will be important to understand the impact of a
global competition for natural resources. Will humanity join together to
solve the issue as a team or will we begin to compete with the result being
great conflicts and wars? What have our past behaviors been in this
regard? These are important questions for each of us to be asking. And
don't expect to hear them from either your broker or the politicians we
call "leaders". Understanding that resources are limited should
inspire the thoughtful investor to look at real assets as a large demand
will only increase the value of limited resources. Think gold, silver,
oil, energy, food commodities, industrial metals/materials, trees or hardwoods,
or any other real asset that is needed by a quickly growing population.
Food security is becoming an issue we will all face and should be included
in our long-term planning. This topic is covered more at www.intentionallivingcenter.com/problem. |
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| An Empire Built on Debt |
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| With over 8 trillion in on record
debt, about 50 trillion in obligations and the need to borrow over 2 billion
dollars a day from foreigners, the United States financial system is at
serious risk. |
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| Although those who have got the
country into this mess will try to convince us that this is perfectly fine,
a real study of the issue casts seriously doubts about this Pollyanna view.
Even worse news is the debt of American households is at the highest rate
in history, savings are at all time lows, and the ATM known as home equity
refinancing is now broken. To make it even worse the US is no longer a
manufacturing or producing nation but a consuming nation with real wages
that are falling. It would be easy to continue as the list is incredibly
long and I have just begun to open this Pandora's Box, but that would just
make us all suicidal. |
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| When it comes to investing in paper
assets it is a bit like a Dirty Harry movie where all of us need to ask
ourselves; Do you feel lucky? Do ya? The global financial system
has been built on a wave of liquidity that has been literally created out
of thin air. Or a printing press if you prefer. This flood of liquidity
is responsible for bubbles in stocks, housing and credit and all of this
is backed by a little known device called a derivative. A financial
device Warren Buffet so aptly calls a financial weapon of mass destruction.
These derivatives are growing almost exponentially and now stand at about
$400 trillion or 10 times the entire yearly global economic output. The
paper financial system is in serious trouble and all of us as investors
need to fully understand this and take action to protect ourselves. 321gold
is a great website for interesting and informative articles on this issue
and is highly recommended as a way of understanding this issue more clearly. |
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| Peak Oil |
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| Many EscapeArtist readers are probably
familiar with the concept of peak oil. For those of you who are not,
peak oil refers to the point in time when the production of oil finally
peaks, plateaus, and then begins to fall. This takes place as demand
continues to rise creating ever growing deficits between the demand and
supply. As oil is the primary fuel for the world's energy needs,
you can imagine what types of conflicts will arise because of this.
Iraq is just one of the many conflicts to come as nations fight for control
of this most precious commodity. If you're wondering why this topic
isn't a major issue in the press- imagine the crisis it would provoke in
the minds of people, the unwanted exposure of our government's true intentions,
and the potential financial backlash to those who profit from the current
energy policies as an educated population forces higher mileage standards,
alternative energy sources and strict conservation practices. This
is an issue those in power don't really wish to see discussed openly or
in detail. Here is an introduction to how our political leaders are
handling the issue. www.fromthewilderness.com/free/ww3/120505_big_crisis.shtml |
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| Peak oil will impact every aspect
of our daily lives. In addition to sending fuel prices much higher it will
send prices of every food product and consumer good to levels few people
have considered or expect. Expect to see the first wave of these
increases in the coming months as large amounts of corn are directed into
the inefficient making of ethanol and taken out of the food supply. This
will impact the price of meat as feed prices rise and any food that has
either corn or corn syrup as an ingredient. These future cost increases
will need to be factored into every portfolio if one is to retain a standard
of living they wish for in retirement. Either that or plan for a
decrease in one's standard of living. You can read more about peak
oil at www.intentionallivingcenter.com/peakoil. |
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| The Boomer Generation Retires |
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| If the above challenges weren't
enough, along comes the retirement of largest demographic group in the
history of the country. At a time when the country is extremely in
the red with promises to pay huge retirement and Medicare benefits to this
group, one has to ask how their retirement will affect the financial world.
Imagine 77 million seniors wanting pensions and services from corporations
and governments who have under funded their retirement obligations for
years. Consider also how a government up to its eyeballs in debt
will meet these obligations. Will the government resort to higher
taxes, defaulting, or monetizing the debt by printing money? If I was a
betting man, and I am, I'd wager a yes on all three. |
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| Since research has demonstrated
that Boomers have not saved or invested wisely for their retirement years,
smart investors should be asking themselves what this trend will mean to
them. For a very enlightening look at this issue I recommend readers
go to http://the-great-retirement-experiment.com/ for what is probably
the best discussion of the issue. For you younger folks, you might
want to consider what it is that these soon to be old geasers will need
in their later years and figure ways to strategically position yourself
accordingly. (As a boomer I can call myself an old geaser so don't
send me hate mail for not being PC.) |
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| Global Warming & Environmental
Degradation |
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| Last, but not least, on this very
short list of future trends is the big one that is now taking center stage
in the global media. I won't really go into this as problem as it
is being pointed out everywhere you look. I would like to discuss one point
on this issue. For years the Global Warming argument has been batted
back and forth. In reality this has been a great ruse or red herring used
to keep people arguing and not dealing with the comprehensive issue. Even
if global warming was not an issue, we are destroying ecosystems at such
a rate we will be destroying ourselves soon enough. Today there are still
those arguing the "scientific merits" of the issue. Sort of like
a bunch of engineers arguing whether or not the Titanic can actually sink
as it slowly disappears below the waterline. |
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| As a trend we know that there will
be a lot of issues we will have no control over and as of yet don't really
understand what may take place. We do know weather trends will change,
sea levels are already rising, and storm veracity seems to be increasing.
So, it is a good bet that investments in insurance companies may not be
lucrative as they once were. More seriously, it may be time to seriously
look at ecological investments as there will probably be an incredible
growth curve in the use of these technologies in the future. In fact, every
dollar we invest in environmental solutions brings us a little closer to
a better world. |
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| Some Final Thoughts |
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| The trends above are quite ominous
and foreboding yet within them are a lot of great opportunities for those
of us who are willing to take the time to educate ourselves to the cycles
and trends and then position ourselves to benefit from them. It isn't rocket
science but mostly common sense. As readers of Escape Artist, you probably
already possess a streak of contrarian spirit so the fact that this will
likely conflict with the information handed out by the mainstream financial
world shouldn't be a problem. It might be for family and friends. |
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| After finishing this article I hope
you will sit down and think about each of these trends as well as explore
where we are at when it comes to cycles. I believe it will be obvious that
as things move forward there will be much greater focus on true, real assets.
Where in the past 20 years paper assets were king, a new cycle has now
begun and, if the trends mentioned above have anything to do with it, should
last for many years into the future. |
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| You can contact me at www.intentionallivingcenter.com
if you have questions or would like additional references. It is my hope
to explore this issue in greater detail in the future as it will affect
all of us whether we live here or are able to make that final escape. |
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| Until then, happy adventures. |
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| Tim Jacobson is the manager of
the Intentional Living and Learning Centre Trust and can be contacted at
www.intentionallivingcenter.com
where the group works to develop projects and strategies for sustainable
living. |
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