Time to Buy……or Hide?

Prices have dropped below even the wildest expectations of potential buyers, yet the summer increase in sales is drying up rapidly in the face of the failures of financial stalwarts AIG, Merrill Lynch, and Lehman Bros, as well as the bailouts of Freddie Mac and Fannie Mae. 

Rewards could be handsome for investors with the guts to face these events and move forward – yet the risks include losing everything if the markets actually collapse. 

From the San Jose Mercury News, Chief Economist for Quicken Loans, Bob Walters was quoted as saying,

“Whenever there’s turmoil, it’s a natural human emotion to go into a defensive mind-set and choose to do nothing.Buying when everyone else is afraid and selling when everyone else is greedy tends to be beneficial over time. But why don’t more people put it into practice? It’s hard to do. It’s hard to buy when you are scared, and it’s hard to sell when you’re greedy.”

What risks do home buyers face?  There is wide spread speculation that global markets are in a state of collapse that rivals that of the Great Depression of 1929. If so, then reaping ROI from a home purchase now may never happen, as the entire currency structure could change.  But how likely is this?  The US economy is among the strongest in the world, and emergency measures such as a temporary halt to all short trading have been enacted.  If it is inconceivable that the US economy could collapse, and I believe it is, then opportunity for upside still exists as it is inherent to a democracy. 

The other question that defines risk is how long will it take for the market to recover?  The Great Depression was a ten year span – should we expect another ten years to go by before our investments bear fruit?   In my opinion (and I am no economist but have had the great fortune to study Economics under one of the greatest profs in the world), the answer to this can be found by studying the difference in transaction time between the two eras.  In the late 1920s, the Internet with its lightening speed transactions did not exist.  Deposits were made to banks by hand, and the US mail carried most sensitive material as faxes did not exist.  The pace of life moves much faster today – which means the near catastrophes we are experiencing now happened quickly, and a recovery can also happen quickly.   

The biggest impediment to a speedy recovery is the red tape associated with the buyout logistics, and the renewal of consumer confidence in the traditional markets.   My best guestimate as to the length of time we will take to recovery is then five years, not ten as in the Great Depression.

But I do believe we have entered into a Depression – and all attempts to call it anything else are attempts to head off the impact by pretending it isn’t happening.  

If you review the history of the Great Depression, many businesses emerged as did the Phoenix from the ashes – portending that those who have the courage and strength to fight the fear and continue to invest will eventually reap even greater rewards for their leap of faith.

Some examples of businesses that actually increased advertising spending during the Great Depression include Kelloggs, Proctor and Gamble, and Chevrolet. All flourished and won out over competition during and after the Depression.  Radio advertising saw a huge growth spurt during this time as well, showing that there is money to be made even in a down economy by driving or even spotting key trends.  

In conclusion – yes, things are bad.  But hiding will not solve anything, and by investing and not losing heart if things continue to worsen before getting better – savvy capitalists stand to show even stronger profits when this mess is behind us and school children are writing papers about the “Great Depression of 2008″.  

I suggest taking the plunge, but only if you are looking for a healthy longer term investment.  Short term thinking is part of what got us into this mess in the first place!