Warren Buffett famously said that the trick to investing is to buy low and sell high. In other words, act when conditions are right to act and take cover when things turn sour. Batten down the hatches and lay low until conditions improve. I cite this bit of wisdom frequently and in many different formulations on the show, but lately I have realized this is incomplete advice. Sometimes the best time to act is precisely when things turn sour. Colloquially, it means making lemonade when life gives you lemons.
Life has been pelting us with lemons for several years now, from a housing collapse and a financial meltdown to the constant and perennial threat of European insolvency. Even the few bright spots on the financial and economics scenes have started to lose their luster. After decades of red-hot growth, China is now teetering perilously close to a debt crisis and recession—something unthinkable even a few years ago. Apple, which has experienced exponential growth for 10 years to become the most valuable company on the planet, has seen its stock take a beating as it flounders with new product launches and weakening demand for tablets and phones. This broad and international sputtering is evident in the Fed’s decision not to raise rates. The Fed has been hinting at higher rates for years but cannot commit to it when the nation’s economy shows so many weak areas. Even in Colorado Springs, the double-digit growth in housing values that we saw in 2013 has plateaued and, in the highest brackets, has actually fallen. It’s a torrent of lemons!
So how do you make lemonade out of wheelbarrows full of lemons? First, you need to disabuse yourself of the idea that lemons are sour and therefore worthless. Gold, for example, has been falling drastically in value for a few years now. Some would say now is a great time to buy gold, or they’ll wait for gold to fall even further, until gold is just face-puckering sour, and then buy it. Eventually gold will rise in value again and those who horded lemons when they were at their most sour stages will reap the rewards.
Consider the government’s Troubled Asset Relief Program, or TARP, that was implemented in the immediate aftermath of 2008’s financial crises. Their aim was to purchase “toxic” assets from distressed financial institutions, then sell those assets when the market improved. Those toxic assets eventually became much sweeter and the government has, in fact, made tens of billions of dollars in profits from those assets. Similarly, housing prices have moderated over the last year or two and interest rates are still historically low. Both seem symptomatic of an economy in which everyone has lost faith. Others recognize that there are still toxins working their way out of the economy, such as Chinese over-investment and European debt, and once those issues are resolved the economy will rebound. These people are purchasing houses while both housing and debt is cheap. Once the economy officially recovers, those individuals will still have cheap debt while the underlying asset’s value takes off.
It has been a fairly rough summer for stocks and finances, but the wisest investors have seen it as a great opportunity to harvest lemons and, when the timing is right, to make lemonade. In fact, Garvens Mortgage Group has been busy this summer preparing a great big pitcher of lemonade that we think our friends, clients, and business partners will really enjoy. But that will have to wait until this year’s End of Summer Celebration. Which, if you haven’t sent your RSVP, is coming up soon! So be sure to contact us and let us know you’ll be there!