This is a transcript excerpt from a 2017 Capitalism.com YouTube interview (Ryan Daniel Moran with a guest, Mauricio) about preparing investments for an economic downturn. Mauricio argues a market correction is inevitable (cycles average ~7 years) and that current ultra-low interest rates and expansive monetary policy increase the severity of a future downturn. He explains why his firm favors mobile home parks as a relatively recession-resilient asset class and contrasts them with higher-tier multifamily and stock-market exposures. Ryan asks about the length/severity of cycles and how to position for opportunities during a correction.
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Anyone can make money in a bull market and everyone's an investment expert when things are going really well. I think it takes a strategic thinker to think ahead enough to say what's gonna happen when the tish hits the fan. How is my investment going to be protected when things aren't so great? When things are really good, I get a little bit nervous about where I invest my cash and I want to know what the game plan looks like if things don't continue to go. Been going for the last few years. So as an investor and someone who pursues cash flow, I asked Mauricio to talk about what their investment plan was if things started to go down. And his answer really surprised me because it showed that they were thinking about what a down cycle might look like. He had some scary predictions about what might happen, but he had a process that gave me a bit of a brain gasm of how to think about investing in the case of a down cycle. And here's what he had to say. Two questions. One, why do you think that there might be a correction later? And two, what do you do to set yourself up to be ready to take advantage of those opportunities? Because once again, as a casual investor or a part time investor, I'm probably going to be on the late end of those types of investments. But as a full time investor and, and a group of investors that is always looking at the market, you're probably gonna have a leg up on those types of opportunities. So what gives you the insight or the perspective that you think it's gonna be a severe correction when it happens? And two, what do you do as a company to take advantage of those?
Well, first of all there will be a correction. I mean there's no doubt about it. The question is just when and how severe. If you study markets, they're always going cycles, there's always an ebb and flow. And it's been, I think now we're in our eighth year of this quote unquote bull market, not only in the stock market but also in the real estate market as a whole. And so it's not a question of if it's going to, it's not a question of if it's going to turn, it's just a question of when. And so that's why we certainly wouldn't be in the stock market now. But even like I said, some of these other multifamily, it's just not the time to be in there. And so we've gravitated towards an asset class that not only is continuing to provide great value for us in terms of cap rates and returns. But, but also, in our opinion, is, we talked about it on the podcast, it's recession proof because it is mobile home parks and mobile homes, it's unfortunate, but they are at the lower end of the spectrum. And so once you get below mobile home parks and mobile home communities, you're either living in your car or you're homeless. There's nowhere else to go. And so what happens in a correction or in a severe recession is you'll see that all of the people who are playing up at the top, they get pushed down to the B level, that get pushed down to the C level, into the D level. But once you're already at the bottom again, there's not much place to go. And so that's why traditionally, if you look at how mobile home parks have done during the Great Recession and other turns, they're not as impacted as the more overpriced A type assets.
And when that market, if there is a correction, or when there is a correction, when the correction, how many cycles have you seen in your lifetime? Because.
We'Re in kind of unchartered territory in the sense of this bull market. This boom has been going on for way too long, it seems, and interest rates are still super low.
I've only lived through two economic cycles in my memory. And so part of my brain is like, maybe we just blasted through the cycle, we just blasted through the downturn, and we're just in another bull market. I don't know. So.
Can you really confidently say that?
I can confidently say, I mean, just, I mean, you know, I do feel a little bit like a dinosaur in the group today because everybody's so young, including yourself. But you don't have to live through the saga. You can study, right? You can study history, you can see the cycles. And they're on average about seven years now. I agree with you that we're living in some unique terms. We've never been in an where interest rates have been zero and this monetary policy, which has been out of control, but that to me, that even fuels more fire. It just means to me, when we do get that correction, we're just basically kicking this thing down the can. So the more these policies that are in place, it just means we're kind of keeping this thing afloat artificially a little bit higher so that when it actually does go down, it's going to go down a little bit harder than most people would like to believe.
And how, in your experience, how My reference point for a down cycle is a dot com boom and the Great Recession.
That's right.
So.
How bad, in your experience? And I know we're speculating.
We're totally speculating. I mean, I think our next turn is going to be potentially as bad as the Great Recession. I don't want to put percentages on it, but I think you're looking at something that's just as bad as it was before. But even if not, even if you don't even get close to that and it's half of that or three quarter, you get close to that, it's, it's a pretty significant down. I don't think it's going to be a soft I don't think it's going to be a soft landing soft recession where things go down 10% or 15%. I think it's going to be a severe downturn.
