Markets Crashing? Rampant Inflation?

[Stephen Johnston]

As a serious investor (mostly public equities) since the GFC, I've heard these scary catch phrases over and over again from friends, colleagues, talking heads and professional investors. I even know some that went to all cash after the huge 30% rally in 2013 only to miss out on one of the greatest bull markets in a generation! Although, they could have re-invested and just not said anything, hopefully they did. 

Now that I am digging into investing in direct real estate I'm noticing similar messages as what has/is being told about public securities! And I'm not just talking about the charlatan doomsday predictors that try to sell you a news letter on how to navigate the choppy waters. 

Here's a few of my observations on the subject:

1. *just bc markets have rallied hard doesn't mean they eventually have to crash, they could move sideways for a long time. 
2. *the 10yr treasury is roughly 1.35% as I write this (7/7/21), even if it triples (3x wow!) over the next 5 years its still only 4.05%. not as juicy as getting a 2.65% 30yr mortgage but it's still very low historically. 
3. *markets usually don't just crash because they've gone up, there is usually a catalyst like some sort of stressor that is added to the system. This would be an interest forums topic if anyone want's to take that on, "what are potential stressors that could pop up?" fun stuff!
4. *past success doesn't grant to the ability to predict the future. Period. Experience would help to navigate periods of rough water however. It drive me nuts when a successful person is being interviewed TV, Radio, Podcast whatever and the interview ask something like "what's your prediction about xyz?" Or "where should someone invest now?" its such an unfair questions to the person bc it's complicated! and cant be reduced to a 60 second sound bite. 
5. * "these markets are out of control!" ok, but in relation to what? Historically?  at what rate? A 10 plex generating $120k/yr may not make sense using 6% debt but might make total sense at 3%. 
6. *how many opportunities have we missed out on bc we thought something was "expensive" and didn't look further? I know I've made huge mistakes investing by sitting out of a particular name because I was going to wait for it to crash. Guess what, that crash never came. 
7. *but ok lets say you are waiting for THE "crash", we got one in March 2020 now what? All of a sudden the world looks different, 1000's are losing their job, 1000's are dying, lending slows down, deals start to fall apart. Assets that you were planning to use as collateral are either dropping in price faster than 1 egg pudding or are untouchable bc the creditor doesn't know how to value under the current scenario.
8. *so you got that cash hoard earning 25bps (maybe) that you've been sitting on for the last 3,5,7+ years, time to go to work! What's the lost opportunity cost of that cash over that period?  Do you go all in at once or do you start to phase in? You get a couple deals under contract but by the time you close it's now April/May and things are looking better (financially anyway). And now those fire sale deals have disappeared and you weren't able to drop your full cash load. Now what? Still wait for the next crash? It can always get worse. 
9. *the take away here, IMO, is not to try and predict crashes but to operate in a way that give you the flexibility to be opportunistic when these random dislocations happen. If you're maxed out and get caught offsides then its game over but if you have a plan BEFORE the storm then you can implement DURING the storm. Blackstone, KKR, etc aren't trying to time the next market crash, do you really think you have more insights/data than they do? They are trying to build an investing machine that can make profitable investments 24/7 year round and still be able to drop the hammer during periods of dislocation. 
10. *Cash reserves are everything and finding the right balance is an art. Too much and you're missing the party, too little and you get in trouble. Also worth mentioning is not all investments need the same reserves, personally I like to ramp reserves the riskier the investment. A stabilized 10plex with long term debt and a corporate furnished contract doesn't need to same reserves % as a duplex rehab in a gentrifying area. Be honest with yourself! Don't start telling yourself sweet little lies so that you can dip into the risky pot reserves, you rascal! 
11. * in closing, just realize that NO ONE (successful or not) can predict crashes or market booms and even when the broken watch is correct now what? Waiting to get in is just 1 part of the equation.