The standard business cycle lasts about 10 years. There’s also a bigger cycle called the long economic cycle which covers a span of 50 to 60 years. Both these cycles go through a boom, a bust, and a blitz, and at each of these stages there are some great opportunities.
The key to making a good play at any point in the cycle is to manage your assets and your liabilities to the best advantage.
First, Two Kinds of Assets
Many things are considered assets but they all boil down to one of two things …
- Real assets. Reach into your pocket and pull out all the cash you have on you. That’s a real asset. Simple. No matter where you are in a business or economic cycle, cash is king.
- Speculative assets. The value of your home is a good example of a speculative asset. It’s speculative because no matter what it’s worth today, six months from now the market price could go up or down. Stocks are also speculative assets.
Speculative assets contain some real worth. Your home will always be worth something, no matter what happens or where the market goes. So there’s a certain amount of its worth that’s real and a certain amount that’s speculative or uncertain. The same goes for your stocks and most other assets.
Next, Good Liabilities and Bad Liabilities
Most people think that liability or debt is a bad thing. But sometimes it’s a very good thing …
- Good debt. A mortgage is good debt. Another form is good debt is taking out a loan to start a business.
- Bad debt. Racking up your credit card to fill your house and garage with toys is bad debt.
The difference between good debt and bad debt comes from what you purchase with it. If you buy assets, it’s good debt. If you buy more liabilities, it’s bad debt.
Finally, Working the Boom, Bust, Blitz Cycle
Most people are out buying liabilities with their speculative wealth during a boom. When the bust happens, it’s never pretty. Boom times are the best time to be selling because prices are high and because of all those people out spending their on-paper profits.
During a boom, you want to stay away from taking on bad debt and concentrate on building real assets. It’s also a great time to sell off your speculative assets while the prices are high.
When a market goes bust, prices fall and it’s time to look for deals. It’s time to buy. It’s your real assets that carry you through a bust. And a bust is the time to leverage that real wealth to take on some good debt and buy speculative assets at bargain-basement prices.
And then comes the blitz. Between the bust and the next boom is the blitz. It’s a crazy time because prices are all over the place. Some things are still doing badly and others are rocketing upwards. This is a great time to leverage all your assets and do a lot of creative deal making.
The blitz is also a great time to take some risks because the next boom is on its way which creates a bit of a safety net.
Every market; stocks, bonds, property, business, all go through the boom, bust, blitz cycle. And by following some simple rules you can take advantage of every part of the cycle:
- There’s never a good time to take on bad debt
- The time to sell speculative assets is during a boom
- The best time to buy is during a bust
- The blitz is the best time to take some risks