Catch the Falling Knife

Many investors are concerned about jumping in too soon and catching the falling knife by the blade instead of the handle. Having been through a few cycles (no comments please), a few observations.

The U.S. is not going to dry up and blow away no matter how much some people want/or fear that it will. I remember investors saying that they would never buy in New York City because it won’t recover in our lifetime. Guess what.

The bottom is actually a series of cliffs. It is almost impossible to tell when the market has hit a cliff and when it has hit bottom except that:

The bottom is mud. Real estate markets rarely bounce, they mostly go splat.

Recovery is slower than you planned, faster than you expected. So plan for a slow recovery but don’t miss it waiting for a clear sign of recovery.

The early bird gets the worm, just don’t bite on a wormy apple that hasn’t fully rotted yet.

The real estate investment market will recover much, much faster than the physical real estate market. There is a lot of money looking for a home and managers remember the last cycle when those who bought right made a fortune. So the money is more likely to jump in too early, than too late.

Buy it as if you are going to keep it – so pay a price that you’re willing to live with. Betting on projections is what got us into this mess.

Investing on the belief that the cycle will turn is not the same as betting on projections.

Start now. The window of opportunity will come fast or slow but either way it will close quickly. Even if the market in general is slow to recover, the window on any particular transaction will be narrow so be ready to jump (on the opportunity, not through the window).

Lender’s and managers don’t like to air their dirty laundry in public, so some of the best restructuring and recapitalization deals will be done in backrooms and either never become public or (like the sale of the GM building) become news when the deal is already done. If you want to participate, you have to be at the table before the deal.

This is a contrarian market so the best place to look for opportunities is where everyone else isn’t. “Don’t throw the baby out with the bathwater” is as true an investment cliche as “investors run in herds”.