See seven steps below how to make your money go up with rebound logic.
Speaking for logic, this is one great benefit of living on the farm…and being surrounded by nature. This has helped a lot during the economic down turn because there is so much balance and logic in nature.
Actually, isn’t logic just a process to try to sort out the reality of nature?
For example, in the last couple of years we pushed about eight miles of roads through the woods so we can enjoy all the land on the farm. Here is a map of the roads.
The first question everyone asks when I take them for a hike on the roads, is “How the heck did you figure out where all these roads should go?” The answer was so simple. “I just followed the deer trails.” Nature is smart. Without degrees in survey or engineering, the deer knew where it is flat and easy to walk.
We see this logic at work up here now.
The geese normally active and sticking their necks out…
just hunker down in the sun, out of the cold winter wind. They keep their heads down.
Everything was jumping in the pond this summer…including me on hot days.
Now only the ducks go near.
The creek, home to so much, most of the time…
is avoided now as well…slick and covered with frost.
We humans of the mountains observe this and follow nature’s logic also. We shut down the cabins.
Because the water will freeze and the roads in…usually glorious green woods.
are not so pretty now…slippery slopes waiting to produce disaster.
We hunker down at the farm…getting ready to head south. I guess it is also natural that we have not been investing in anything much during this time either. The birds and deer have all left and Merri often says that it is time for us to go when they all leave!
However. we know that the sun does always shine somewhere and that dawn rises after even the darkest night.
During September 2007, when markets were near their top and hotter than firecrackers, this site warned to reduce equities and debt leverage.
Now that markets have crashed and interest rates are low and dropping, let’s think a bit….about potential reward and risk…and what could happen next. Maybe the economic winter is waning which means it is reaching time to spring.
Assume that the 2007 to 2008 stock market crash has been a once in a life time ordeal like the 1929 to 1932 drop.
Here is what happened from 1929 to 1935.
As the roaring 20s peaked, the Dow rose to 381 in 1929. Then the market headed south all the way down to 41 by 1932! That’s an 89% plunge.
The Dow beginning in 1932 rebounded from 41 to 200 by 1935…a rise of 400%.
In 2007 to 2008, the Dow fell from 14,000 to 7,300…a 47% plunge…abut half as much as in 1929 to 1932.
Now the Dow is back to 8,600…maybe on its slow way back up.
If so, let’s assume that the rise from 2009 will also be half that of 1929-32. A 200% 2009 to 2015 would bring the Dow from 7,300 to 21,000. Sound crazy? Maybe. Maybe not. If the US dollar crashes and brings inflation, investors will rush to real estate and stocks to protect their wealth.
Plus I am sure when the Dow was 41…no could believe it getting back to 200. Just like when, in the early 1980s, gold was selling at over $860 an ounce. Then it was hard to believe that it would sell for less than $300 an ounce nearly 20 years later.
Keep in mind for the Dow to get back to its last high of 14,000 from 7,300 requires almost a 100% rise. IF such a fact were correct (the Dow rising 200% between now and 2012), let’s calculate some risk versus reward.
IF we invest in equities today and our investment matches the Dow and the Dow rises 200% in the next six years, a $100,000 investment would grow to be worth $300,000. That is a 33% return per annum …much higher than we would normally expect. Yet look how much extra leverage one gained in 1932 to 1935 after the overcorrection. So one could argue the rationale of such a return.
IF we used the $100,000 investment as collateral to borrow $100,000 more and reinvest this in the Dow at an average loan cost of 6%, our interest from 2009 to 2012 would be $18,000. The $200,000 now invested (if the Dow rose 200%) would be worth $600,000…less, $18,000 (interest) or $587,000. That is an 81.6% per annum return on the $100,000 originally invested.
That’s the potential reward. Wow! Would that extra profit be nice six years from now!
Before we get too excited, let’s examine the risk. Assume that we are wrong about the 2007-2008 plunge. What if instead, it plunges 89% instead. If so it still has 47% to go down before it reaches 1540.
So let’s look at what happens to that $100,000 invested with another $100,000 borrowed. $200,000 down 47% becomes worth $106,000. You still owe $100,000 so you would have lost 94% of your original $100,000 plus interest. Your banker would have needed you to put up somewhere around $50,000 of collateral along the way or you would lose almost all, (if not all after fees and interest) of your entire investment.
We have to ask ourselves, “Is the market correction over or are markets still headed down?”
Here are seven steps you can take now to prepare to spring ahead with the rebound leverage.
Rebound leverage step #1: Realize that even without the leverage of extra borrowing you can gain rebound leverage by just being in the market….but that the market can still drop short term.
Rebound leverage step #2: Review with your investment manager or adviser how much you can invest in the market now and how much you will need to hit your capital needs six years from now.
Rebound leverage step #3: Come to a decision with your adviser how much you feel the market could rise …and/or fall.
Rebound leverage step #4: Calculate, as I did above, how much profit you will make if the market reaches your highest estimate. Calculate also how much you would lose if the market drops to your lowest estimated level.
Rebound leverage step #5: Calculate what the profits and losses will do to your capital needs position in six years.
Rebound leverage step #6: Decide if you need the extra leverage of a loan and decide if your total current capital position is sufficient to protect your investment if the market drops to your lowest estimated level.
Rebound leverage step #7: Start looking for good value shares that can help you gain even higher profits and that have even less risk than the Dow so you can spring ahead when the numbers behind your calculations become logical for your investment position.
There is more to this equation. The Dow and US shares are just one small portion of global markets now.
Plus currencies have changed enormously. The US dollar has fallen…badly for 37 years. Even minor currencies such as the Colombian peso, and Brazilian real have risen steadily 25%, 50% and more versus the US dollar. Until 2007, the dollar suddenly zoomed up…as stock markets collapsed around the world.
Will the dollar remain steady, rise or fall again?
At the end of 2008 we have seen enormous sideways motion. This is the worst scenario for short term investors. Yet there is a way to earn even in these worst times…by learning how to spot value…that turns turmoil into profit and by learning how to think for the longer term.
Though the dollar may enjoy short term revivals, the greenback’s inherent weakness is worse than one might think. The huge bailout by the US government is almost sure to create a long term fall of the US dollar.
Yet what currency should investors choose? Chinese yuan…the euro…gold, oil? Would you trust your life savings to speculate on that?
Three scenarios are likely. First, The US dollar will fall more…much more.
Second, there will be confusion. Many…in fact most uninformed investors will lose…a lot.
Third, there will be inflation…worldwide due to the excessive spending in the current global financial bailout.
There is an economic tug of war between inflation and deflation now. The economic and market correction is deflationary. The global government bailouts are inflationary. We need to keep an eye on both trends but history comes down on the side of inflation.
Smart investors who know how to spot value in multi-currency portfolios at some of the world’s safest banks earned 57%…120% …263% before the the doom and gloom, in the hot days of 2005-2006 and 2007.
More important these same investors can earn as much again when markets recorrect…especially when they add bear market investment loans to enhance the rebound leverage.
Everyone needs to know how to have multi currency diversification and our Multi Currency Educational Service is normally $249 for a very long and educational year! However, in December we are offering a reduced subscription of $175.
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