Wednesday, April 19, 2006

Long division? * 20 / 10 / 5 * A useful analogy.

Every once in a while, you come across a useful analogy that can help you in your own life, in your own particular situation, that helps you better yourself, or break out of a tired old mental model that no longer works for you.

Whatever it is, you strive to remember it, and use it to your advantage.

I've been reading some of the Robert Kiyosaki books (of Rich Dad, Poor Dad fame). Now I've read some disparaging reviews of his books and the like, but frankly, I like them. I think he brings some good information down to a level that almost anyone can understand, and I always admire people like that. The fact that he's overcome his own learning disability to become very successful, makes me admire him all the more.

Anyway, in one of his books, his "Rich Dad" gave him a piece of advice about the markets that can both help one prepare for profit and be mentally ready for diaster.

His rich dad told him that the markets run in a 20 /10 /5 cycle.

For twenty years, the stock market is popular, and produces good returns. For ten years, commodities rule (we're in the middle of this now). And every five years, there's some type of crisis.

His "rich dad" cautioned him that the timing wasn't exactly precise, but was a rough guide that seemed to recur with regular frequency.

This is a useful analogy in my view, because it allows you to be prepared for the next crisis which, according to the guideline, might be arriving very soon. In 1997 we had the "Asian contagion" and shortly thereafter the Long-Term Capital near crisis, and then in 2001 the terrorist attacks. According to the timing of this formula, some crisis may be arriving on our doorstep soon.

What it is, obviously is somewhat unknown. There's been a lot of talk about "global imbalances" with relatively little talk about how that might play out or trigger a crisis. Perhaps it would be in form of a rapid movement away from the US currency. Or perhaps the rising of interest rates and slow drain of liquidity from the markets will trigger some type of crisis in the real estate market that will spill over in some unforeseen way to the broader markets. Or perhaps it'll be something that sideswipes from "out of nowhere". The point is, is that some preparation might be warranted at this point.

This would include, in my opinion, careful review to ensure that your portfolio isn't excessively exposed to any one over-valued or speculative sector, and that it generally appears robust and reasonably valued. And of course, a review to ensure that you can handle any leverage you're using, should one or two factors about it turn negative.

Analogies - use them, or lose them!


The Confused Capitalist

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Dave said...

Stay away from Kiyosaki. He's a bad ass.

drew said...

Huh, I learned how to get rich from his books. bought my first property 5 years ago and now have 5! To each his own.

Anonymous said...

Education helps some and some can't be helped. Next. Rich dad books open your mind to riches that are available. Now it's up to us.