Maximize Profits in Any Stage of the Economic Cycle Even a Recession
This is essentially an overview of my book Recession Proof Real Estate Investing: How to Survive (and Thrive) During Any Phase of the Economic Cycle. But there’s a whole lot more that we as investors should understand in order to navigate the economic cycle. There are also a whole lot more strategies and tactics that we can be using to reduce risk and maximize profit during a recession or during any other phase of the economic cycle that we won’t necessarily cover here.
So, if you find this introduction valuable, I hope you’ll check out the book. It’s available in the BiggerPockets Bookstorein all formats.
We live in a transactional world. Every day, billions of times per day, financial transactions take place between buyers and sellers. Buyers give money in the form of cash or credit to sellers, who in return provide a specific good or a service.
For example, I might give cash to a restaurant for food. I might give cash to a car dealership for a new car. I might use credit in the form of a bank loan to purchase a house. These billions of transactions per day are based around many thousands of different good and services.
A market is simply the aggregate of all the transactions around one specific product or service.
The automobile market is simply the sum of all of the transactions that involve automobiles.
The gold market is all the transactions that involve buying and selling gold ## ## .
The real estate market is simply all the transactions that involve real estate.
And the stock market is made up of all the transactions that revolve around the buying and selling of public stocks.
And there are thousands of these markets. The corn market, the wheat market, the pork market, the oil market. The cell phone market, the personal computer market, the software market. The residential housing market, the commercial housing market, the self storage market. There are literally markets for any other good or service you can imagine.
Related: Recession Prep 101: Investing in Real Estate During a Financial Crisis
What Is an Economy?
All of these markets put together is what we call an economy.
To recap, the economy is made up of thousands of markets, which in turn are made up of billions of transactions. When we talk about the economy, we are simply talking about the sum all of those transactions within all those markets.
As you might expect, the number of transactions and the size of transactions that take place every day across all these markets isn’t always going to stay the same.
There will be months and years where there are more and bigger transactions. When we see more and bigger transactions, and there’s lot of cash and credit flowing through the markets, we typically refer to the economy as strong.
Then there are times when there are fewer and smaller transactions. During these periods, when there is less money flowing through the markets, we typically refer to the economy as weak.
There are a number of economic factors that tend to come together to make an economy strong; then, over time, those same factors that led to the strong economy will cause issues that weaken the economy and push it down. Eventually, those same factors will conspire to lead the economy to become strong again.
What Is a Cycle?
This pattern of strong economy leading to a weak economy leading back to a strong economy is called a cycle.
One period of economic strength and growth leading to a period of economic weakness and contraction and leading back into a period of economic strength and growth is referred to as a single economic cycle.
These economic cycles happen regularly. In fact, we’ve had 33 of these full cycles over the past 160 years.
Thirty three full cycles in 160 years? Some quick math tells us that an average economic cycle lasts about five years.