My greatest profits (and losses) have come from distortions in currencies and property prices. Now the these two distortions and one other have come together to create an unbelievable deal. See why below what I share here is true!
Read the case studies first, then I’ll explain.
The Tiffany lamp casts an amber glow, rich ivory and warm in the grey gloom of early dusk. The gold knobbed mahogany desk, its deep patina waxed and smooth, shines with reflections of ancient leather Chesterfields stuffed full, but rumpled with age and of maritime shots that hang in brass frames on the wall. The room speaks of settled tradition, the kind that might never end. But my thoughts instead are on the demise of this room, and how it is coming soon.
1976, London, England. Artillery Row near the houses of Parliament. After building my business in Hong Kong, I moved to London and carried on expanding there. Business grew and I opened up a new market, the United States. The pound had reached an all time low of nearly 1.5 dollars per British pound, which made the dollars from my U.S. direct mail campaigns more easily profitable. Lured by increased sales, I left my one room office that sat over a coffee shop in Wigmore Street and moved into a five office suite of antique offices in Artillery Row and began building up a staff for expansion. We bought a computer, a Data General about the size of a refrigerator with 64K of processing power. Then that was a big deal and costs about $75,000. I felt very good about everything because I saw great potential in the United States.
The offices were everything English tradition could provide, balconies overlooking Victoria Street near the River Thames and Buckingham Palace, leaded frame windows, antique partners’ desks, leather couches and chairs, thick carpet and old paintings that were exquisitely framed. The office looked like it had been there forever and would stay there too until the British pound strengthened and rose 37% versus the U.S. dollar from 1.50 dollars per pound to 2.40 per pound. The fee I charged for the service I was providing was $99 per year. At 1.50 dollars per pound, I received 66 Pounds. When the pound had strengthened, the same $99 brought me 41 pounds. My business which averaged 20% profit on sales now lost 17% of sales! This was a hard and expensive lesson for me to learn. I sold the offices and left London just to stay in business. Currency changes often create more profit or loss than any other factor in business today.
The British pound was once the reserve currency of the world, but as the dollar could do now, it started falling steadily against other major currencies at the turn of the 19th century. At one time, it took US$10 to buy one British pound, but it had fallen steadily so that when the Bretton Woods Agreement disintegrated in 1971, it took about US$2.50 to buy one British pound. It then plunged all the way from US$2.50 to a low which reached US$1.00 per pound. It has since recovered back to over US$2.00 per pound and since weakened to the US$1.50 level where it has remained for more than a year at the time this course was written.
But interest rate moves don’t only create losses. My biggest profits have come from currency and property swings as well as the case study now explains.
Earlier in 1970 I had also lived in London, England for a year, then moved to Hong Kong. During that time I also maintained a home outside of San Francisco, California.
This was a time of great inflation. My homes in California and in Hong Kong appreciated greatly. In 1976, when I moved from Hong Kong back to London, I noticed that London real estate was priced about the same as it had been in 1970. This puzzled me. Why had London property prices remained flat despite inflation?
On investigation, I learned that there had been a huge real estate crash in 1970 which continued to dampen real estate prices six years later despite the rampant global inflation. Then at the same time, the British pound collapsed suddenly over 35% versus the U.S. dollar from 2.4 dollars per pound to a new all time low of 1.52 dollars per pound. To my way of thinking London houses, which I thought were already very cheap by world standards, just became 35% cheaper.
I could not resist, started property shopping and eventually bought an old five bedroom house in Bedford Park in west London. I converted $15,200 to make a 10,000 pound down payment and took a 25,000 pound loan to meet the 35,000 pound asking price I had negotiated (about US$53,250). A couple of years later, the pound rose and as mentioned in Case Study One, so did my business losses. I had to shut down my business and move. This meant selling my London house. Here I discovered that I made some great profits.
First, I had been right. London property had been underpriced. I was able to sell the house for 115,000 Pounds. I made a profit of 80,000 pounds. But the currency change helped enormously too. The pound had risen from 1.52 U.S. dollars per pound back to over 2.2 dollars per pound. My 80,000 pound profit was not worth US$121,600 (value at the 1.52 rate) but was worth $176,000. I earned $54,400 extra profit because of currency moves!
There is much we can learn from this case study both about real money, international purchasing power and how they affect currencies. This study is a classic example of how real money moves versus currencies that have been adulterated by governments.
In this case, property was the real money. Residential property is a classic hedge in times of inflation and currency destruction because it always offers a real service of value, i.e. a home for one to live.
In the study, this real money was first lowered by a local real estate crash. Most British real estate buyers were not aware how inflation had pushed real estate prices up in other countries. They were inadvertently beggaring their neighbors. British businesses could operate cheaper then elsewhere because it cost less to house their employees. This gave Britain an unfair advantage. Their low real estate prices were not caused because there was a greater supply of British land nor were British builders more efficient nor were British building materials more abundant. British homes were cheaper only because investors elsewhere had not yet seen the discrepancy.
Then prices really became cheaper when the pound crashed. I was lucky to buy when Britain was beggaring their neighbors the most. This did not last long. Overseas buyers (like myself) caught on to the cheap prices and Americans, Japanese and Arabs began buying London homes. Prices soared. So much money flowed into Britain that the pound rose.
As is usually the case the pound had been oversold at its bottom, so that it rose dramatically. The effect was shattering on my business (remember that at work I had pound expense, but U.S. income), but in my house sale, the results were wonderful.
Much of the profit I enjoyed from the sale of this house came from the very forces that later nearly ruined my business. I was sitting at just the right place at the right time and the falling currency earned me a big profit. Later (as you saw above) the pounds rebound nearly ruined my business.
The falling pound made money for me more than once. My clients cashed in tow when I spotted both a real estate and currency distortion.
While living in London and being aware of this trend of the falling pound and of the fact that it fluctuated often I noticed that Lloyds Bank, one of the London banks I used, was just beginning to issue a new executive gold card which included an unsecured 7,500 pound line of credit.
I recommended that clients apply for these credit cards, borrow the 7,500 pounds and convert them into a hard currency for investment into London property which was so low. Those who took that advice profited nicely. The pound fell over the next year back to US$1.40 per pound. When they took the loan, they were able to convert the pounds into dollars at US$2.20 rate and obtain US$16,500. When the pound reached $1.40 per pound, it took only $10,500 to buy the 7,500 pounds required to pay off the loan. Those investors made a quick 60% before they even made an investment! Thus they earned a return on their dollar investment plus made a huge foreign exchange gain, plus gained huge profits on the real estate they bought.
There are several lessons we can learn from this case study.
- Lesson #1:
Fortunes can be made just because of currency moves. In this real example, investors made 60% on the money they had at risk in just over a year, from just the currency move!
- Lesson #2:
Timing is of utmost importance. In this study, investors borrowed their loans at almost exactly the right time. Had they borrowed a year earlier they would have waited much longer to make a profit. Had they borrowed later they would not have made a profit at all.
- Lesson #3:
Great losses can occur because of currency moves. Any investor who borrowed pounds and converted them to dollars a year later suffered a loss. After the pound reached a low in the US$1.40 range, it then strengthened back to US1.90 and maintained that strength for several years. An investor who borrowed pounds and converted to dollars at the 1.40 rate received $10,500. $10,500 converted at the $1.90 rate would create only 5,526 pounds, a loss of 1,974 pounds or a loss just from currency moves of about 26%.
- Lesson #4:
Borrowing can leverage profits or losses from currency moves. In the case study, investors made as much as 60% (or could have made a 26% loss) only on borrowed money at risk. They did not have to invest their own cash.
- Lesson #5:
Interest rates are a crucial to the way a currency will move. The investors in this case study paid higher interest for the pound than they could earn on the dollars they obtained from the conversion. Generally the weaker a currency is, the higher its interest rate will be. However, if a currency is oversold, the higher its interest rate goes, the stronger the currency will eventually become.
- Lesson #6:
When currency and real estate prices are distorted together profits potential becomes almost phenomenal.
- Lesson #7:
When currency, interest and real estate prices are all three distorted, the deals become almost unbelievable.
Now that you have reviewed this case study, let me explain the seven reasons why you can buy 38 acres on the beach for as little as $25 per month.
Manta is the fastest growing part of Ecuador, because a U.S. military base is being installed there. Money is flowing in for the yanks and the construction at the base. Huge numbers of civilian contractors have already moved in from the U.S. I am told that Sheraton is adding a 400 room luxury hotel and Marriott and Howard Johnson are said to be coming in as well. Continental Airlines expects to add a direct Newark-Manta flight in about six months and American is said to be adding a Miami-Manta flight within the year.
Ecuador has just come through its worst depression in history. Everything came to a grinding halt. Now the economy is recovering especially in Manta but many people are still hurting for some their time has run out and they have to sell assets.
The government has just built a brand new highway along the coast south from Manta to the village of Puerto Lopez. This road hugs the coastline creating stunning Pacific views similar to what you see on highway 101 on the U.S. west coast.
Puerto Lopez is a perfect ecological tourist spot with hundreds of thousands of acres of national park, many protected species of wildlife, whale watching, incredible deep sea fishing, diving, surfing, horse rising hiking and rustic seaside charm. Traffic to this village has doubled year after year even during the depression. Traffic between Manta and Puerto Lopez is bound to grow by leaps and bounds!
The owners of the land on this new road between the highway and the sea do not understand what that value of the highway adds to their land yet.
Dollarization in Ecuador has further confused land owners as to what property prices should be. So some prices are ridiculous. One tract I walked of 38 acres with nearly a half mile of broad Pacific beach is being offered for just $15,000!
Because of economic problems in Japan, yen loans are as low as 1.75% Even with fees the cost of a Japanese yen loan is as low as 2% or $25 per month interest on a yen loan that is equivalent to $15,000. O cash is needed. If you have any acceptable liquid asset (you’ll need a value a little over $15,000 of stocks, mutual funds, CDS or bonds) as collateral Jyske bank (and many other European banks) will make the yen loan at these low rates.
I will review this strategy and what is happening with Ecuador property and global currencies at the upcoming International Investment & Business course April 25-28. Then we will conduct an Ecuador real estate tour staring in Quito and Cuenca (May 3-11) and then our daughter Francesca will take part of the group onto inspect the coast (May 12-15). I hope to see you in Vancouver, Ecuador or both!
Good news, I just received a batch of incredible pictures from our last Ecuador trip and will post them shortly.
Until then, good global investing!