Knowing About Business Cycles
Business cycles are relatively short wave growth and decay that affect the economy. This means that the trend of long-term growth of developed economies is not a smooth linear line. This trend of growth is accelerating moments and moments of slowdown in growth.These movements are called cycles and all economies go through these cycles. The danger faced by the investor at this stage is to invest in stocks at a time when the cycle is at its maximum and have the need to sell your investment when the cycle is at its floor, with the loss that this entails. To avoid this situation, as investors will have to learn to try to detect when they start and when they complete the cycle. Easy task, but that is the main objective of the economy.
But problems do not end here. As companies in their quest for growth through innovation and increased productivity are able to grow, but the process left in the way companies less innovative, less competitive, with products and services more expensive and of lowerquality that the winning company. The company, the winner, out of the market to the company losing. This process has the name of the process of creative destruction, the new company creates a new process or system and destroys another company. As investors, we will not only be analyzed when there are positive economic cycles, but also in this series the winners of this process of creative destruction.
The same can be applied to real estate investment. First, the cycles have much influence on the real estate cycle. That is, when the economic cycle is positive, the real estate cycle is very positive and vice versa. Therefore, it is vitally important to predict the cycles when it comes to predicting the real estate cycles. Second, the process of creative destruction also occurs in real estate investment. The most innovative and creative investors move to more rustic investors. Let’s see an example to better understand this point. Five years ago began construction in Buenos Aires buildings with what was called amenities, this meant buildings with very interesting additional services such as gyms, sauna, cinema, swimming pool and many more services. These buildings, through which differed from the rest might have a selling price much higher than other buildings.Therefore, were the winners of the process of creative destruction and buildings with no amenities were the losers in the process of creative destruction.
Therefore, the key decision-making process in a capitalist economy:
Detect trends and take advantage of the cycles (economic, stock market, real estate) and within the trend to detect the winners of the process of creative destruction
If we as investors we perform these activities successfully managed to multiply our money in a sustained manner. Of course, it is very easy to say and very difficult. Large global investors have full teams of economists trying to predict these two variables. Ever been achieved and others less so. But this does not mean we have downplay these two facts.
Often simply knowing the rules of the game allows me to make investment decisions much more efficient with our savings.