Less Restaurant Consumers in 2008

After the stock market tanked in October, 2008, Colorado Springs restaurants were ghost towns for awhile.  We stopped eating out as much, which is better for our waistlines anyway, and apparently a lot of other people decided also that eating at home saved money.  I’m sure it was a very scary time for restaurant owners as they tried to keep their employees working with virtually empty dining rooms.  The good news was that when you went out to eat, you were seated right away, but at a huge cost to the local economy. 

Do You Think Service Has Improved?

Now, it is June, 2010, and when we do go out to eat we see more people in the restaurants, but I don’t think it’s at the same level it was during the summer of 2008.  I know we personally have cut down on how often we eat out and we made that decision first in an effort to eat healthier and also to save more money as we build our assets to get to retirement.  The thing we have noticed is that restaurants also seem to be appreciating their clientele more.  Service is much better in general than it was 2 years ago.  I don’t think we are the only ones not eating out as often so restaurants are competing for less customers.  If we get bad service we will think twice about going back.  If we get great service, we notice, and appreciate the effort of the servers and the training they are obviously getting to help them serve customers better.

Let’s Keep Good Service Going

When the economy is roaring, all boats float.  But when times get tough, you get to see who is left standing - those who understand what business is about and understand the value of their customers.  We aren’t past seeing changes yet.  In the long run, everyone will have a new perspective of what is important in life and I think we’ll be better for it.  Restaurants are not the only businesses affected by less business.  The real estate industry has definitely lost a lot of jobs.  We are seeing tightening across most industry segments.  As things improve and people “go back to normal”, I don’t think normal will be the same as it was 3 years ago.  We can all hope the lessons of providing good service continue to be kept top of mind.

Personal Finance Blogs and Saving

I took some time yesterday to look at a few personal finance blogs.  My daughter has been telling me about those that she follows, so I checked one out.  That blog is The Simple Dollar.  The author has a “picked myself up from financial ruin and improved my life” theme and he appears to post good common sense - which as you recall, is not so common anymore.  Reading his blog made my always synergizing brain start pumping out ideas for posts.  The real life of someone else is always a touch stone for others, whether they shake their heads in disbelief or nod because they relate.  The particular post I found interesting concerned snowflaking as a method to reduce debt or increase savings.  It is all about forming positive long term habits.

My Method for Saving While Still Having Fun

I always encouraged my daughters to save.  And those lessons carry forward because they are both still savers and investors.  That doesn’t mean they don’t have fun and spend money.  It just means they are intentional about their spending.  Being frivolous was not a way of life in our household.  It is something you do once in awhile to have a fun moment that you remember with glee.

So what is the savings lesson?  When I was a financial advisor I taught that there are 3 types of saving - one for short term or emergency needs, one for midterm needs (3 - 10 years) and one for long term needs (10 years or further away).  I am no longer an advisor and this column is not intended as professional advice.  I just know a lot about it and like to share ideas that can be helpful.  It is always important to have money tucked away in very safe accounts to meet those short term needs.  If your car breaks down or you have to go to the dentist, or some other non-negotiable event occurs, you need to be able to pay for it without racking up debt on your credit cards.  This money can’t be risked.  General guidelines will tell you to have 3-6 months worth of living expenses.  I say work towards a year’s worth of cash, especially with the employment situation the country is in right now.  Wouldn’t you like to NOT have to worry about where your money would come from for a year if you had no income coming in?  If you are retiring, it is good to have 2-3 years of income in cash just in case the market does what it did in 2008 and you will have some time for your longer term investments to try to recover.

Mid Term Savings and Long Term Savings

What things would you save for that might be out as far as 10 years?  How about paying cash for a new car or at least putting down a large down payment so you can pay it off in 2-3 years?  How about a real estate investment that you would like for an income stream from rentals or a lake house to use on weekends?  How old are your children?  Will they be going to college within 10 years?  Wouldn’t it be nice to have a cushion to help with those expenses?  I’m sure you can think of other desires you have for the next 10 years.  For retirees, these investments should include your less volative investments that provide income or future appreciation that you can tap into 5-10 years down the road.  Investments that won’t be needed for 10 years or more can be positioned to generate higher returns but they also typically incur greater risk.  Many people who are retiring soon think they need to get rid of all risk in their investments.  But the bigger risk is inflation.  Ask yourself this question - are you going to USE all your money within the next 10 years?  I didn’t think so.  So think differently about risk and read some good books on the topic.  You can start with titles in my Recommended Reading List on this site.

Saving for Fun

Well this is all well and good, but we did mention fun at the beginning of this post.  I’d like to share a story about my youngest daughter’s savings habits when she was still in elementary school.  She was perusing her savings one day and I stopped to chat with her about how she was doing.  She was a very wise child and said “Mom, I have 3 jars of money.  The first is for fun cheap stuff, like candy.  The second is for things that cost more, like a video game.  And the third jar is for the money I’m saving for something special I might want that is more expensive.”  I thought that was a pretty good plan for an elementary age saver.  She had already decided that some money wasn’t to be touched unless it went towards a specific financial goal.  We eventually put her “more expensive” jar of money into a money market account and she left home with it intact when she went to college.  And 8 years later I would bet she still has most, if not all of it.  That’s the way long term money is supposed to be handled - as if it doesn’t even exist.  And she still had the freedom to spend her short term (candy) and mid term (video game) money because she made a plan.

So make a plan.  Check out some good personal finance blogs (The Simple Dollar) has links on the home page to Blogs I Read), read some good books from the library, and keep coming back here for more insights to help you create wealth and breathe a sigh of calm because you are putting away 3 types of money.  You can afford a fun reward to celebrate all your efforts.  If you need to tackle debt first, read some of Dave Ramsey’s books to get you started.  Create good habits to replace the old bad habits.  Now, go out a buy yourself a little treat because a fun reward doesn’t have to be expensive.

Some words are tossed around easily and used in advertising unsparingly.  It takes the power away from them because they are seen so often they are dismissed as just more noise.  In thinking about that, I thought about the word Dedication.  My team and I are dedicated to our clients, but what does that really mean?  How do you know we are dedicated?  Is that a description of a business person that you’d like to work with?

Dedication According to Webster

Webster’s Dictionary defines dedication as self sacrificing devotion.  Wow!  That’s pretty heavy duty.  Soldiers are dedicated to our protection.  That’s the first thought that comes to my mind.  Firefighters who ran into the towers on September 11, 2001 were dedicated.  They saved a lot of people through their dedication and many of them lost their lives - self sacrificing.  Most people are dedicated and devoted to their children.  So does the word dedication belong in business?

Dedication in Business

To me, dedication in business is putting your clients’ needs first.  In a retail setting that would mean providing excellent service, going the extra step, and being available to assist customers skillfully when they need help.  In a professional service industry, such as accounting, financial advice, lending, banking, real estate, law, among others, it means providing the fiduciary service to the client that has been promised to them by commitment of the professional to their industry.

In my business, it is doing the absolute best for your client by providing advice, service, and skill that helps them achieve the goal they have set for themself.  Being dedicated also means being truthful upfront so the client knows what to expect throughout the process.  In other words, helping them avoid the unexpected by being diligent, knowlegeable, and communicative.  Better get out the dictionary, we are loading up on big words here!  But it all comes down to 2 words - dedication means acting with integrity and ethics.  That is the type of professional I want to work with - one who is dedicated.  They always rise to the top because they don’t know any other way to be - being dedicated is in their genes.

I’m a trend analyst.  Not by formal training, but by nature.  Trends help me try to make sense of the universe.  I really must be a math geek because I am always looking for patterns.  I guess that’s why stock trading appeals to me.  As the DJIA hovers around 11,000, my curiosity peaked and I decided to take a random, or not so random, walk through recent history.  A lot of people follow the S&P, but I like the DOW.  It’s a microcosm that tells us about America.  I use the S&P and Nasdaq to verify what I think I’m seeing.

RECENT HISTORY

So what did my walk tell me?  That being in the market and investing regularly is a good thing.  I’ve mentioned before how the market went sideways through the 1970s but people still made money.  They did it by continuing to invest smartly.  As I get close to retirement I have tempered my usual aggressive self somewhat, but if you still have 20 or 30 years to invest before starting to withdraw assets, you may find my trend analysis interesting.  Even you old boomer farts (like me) might want to follow along.

A SIDEWAYS TREND

We have been in a sideways trend between 10,000 and 11,000 for the past 6 months.  That is the longest sideways run since 2007 when the DJIA moved sideways in a 1000 point range for 9 months.  It will be interesting to see if we break 11,000 and move up or meet resistance for awhile.  After hearing my analysis, you decide what you think will happen.  Starting in April, 1999 the DOW hit 10,000 and didn’t look back until the market bobbles in 2001 and 2002, in effect a 3 year run before a major change occurred.  Then in May, 2002 the market started a slide to around 7500.  Recovery was quick - 10 months of hand wringing until the market started up in March, 2003 and was once again above 10,000 in December, 2003.  People who kept buying (that would be me) were happy and had a nice double digit increase in 2003.  The DOW stayed in a range between 10,000 and 11,000 when it once again started rising in February, 2006.  At that point the market kept going up and up for 20 months until the DJIA was over 14,000 in October, 2007.  It was a lofty year for stocks and real estate alike.  But then things started to change.  After such a heady rise for over 4 years, it was hard to appreciate that the end was near in October, 2007.  The DOW stair stepped it’s way down to 13,000 and dropped to around 11,000.  It was a confusing market.  The average 401k investor couldn’t tell if it was building resistance or support. (Check the recommended reading list if these are foreign terms.)  Hindsight tells us it was definitely resistance.

In August, 2008 the party came to a crashing end with a 3 1/2 month long freefall that caused people to start crying “depression”.  Those who had ignored everything occurring in the economy were blindsided and lost 40-50 percent of their investments.  A 28% drop occurred during those 3 1/2 months with another 16% decrease until the DJIA hit bottom in March, 2009.  With the mortgage debacle that was happening, bonds weren’t sacred either.  The chase for higher bond yields in funds put these investments at risk.  An interesting aside is that market volume started rising above 2 Billion shares in September 2005 and continued to rise until it hovered mostly above 5 Billion shares from August, 2008 until June, 2009.  Volume still is hovering over 4 Billion shares, double the rate in 2005.  Who is buying and who is selling?

THE GLOBAL ECONOMY

So now we’re touching 11,000 on the DOW.  We’ve been above 10,000 since November, 2009.  The real estate market appears to be recovering.  But where are the jobs?  Where will they come from?  The banks are sitting on their impressive returns after TARP money was handed out, but businesses need capital to grow.  Without business growth there is no job growth.  The government doesn’t produce anything so all the “stimulus” activity is just blowing sand until business owners start feeling confident enough to start letting go of the purse strings.  I don’t see that happening in the real estate market yet.  Realtors are conserving cash because they know (those that educate themselves) there is another wave of foreclosures coming that will affect real estate prices until 2013.  Arms are resetting.  One of every 6 mortgages is in default and 1 in 4 mortgages is underwater.  There is phantom inventory sitting in bankers’ portfolios and there are phantom short sales overhanging the market because some delinquent loans haven’t been foreclosed on….yet.  But does that all mean you should pull out of the market and hunker down for the long haul?  Everyone has to check their gut to see how they feel about that.  I’ve pulled back more than I normally do, but I have a short timeframe before I need to tap into my money.

For people with a long view, this market offers buying opportunities that are appealing for both stock based investments and real estate.  We could have a long sideways market.  We could see the market slip again if a lot of bad news hits the presses.  My gut is telling me that we’re not going to see any long sustained increases in the stock market or in real estate prices anytime soon.  Only time will tell me if I’m right.  The DOW is still 22.5% lower than at the height of the market in 2007.  We’ve been over 14,000 before and we’ll probably get there again.  We just don’t know when that will happen.  We not only are affected by what happens in the US but by what happens worldwide.  China owns a lot of treasury bonds.  The EU is having issues with Greece and trying to decide when/if to step in to protect the euro.  The EU is like a mini US now and they have to play nice with each other to hold things together.  It will be interesting to see what financially solid Germany does as things play out.

WHAT SHOULD I DO?

Some people are comfortable being contrarians and taking educated risks to try to take advantages of market opportunities.  Others are more comfortable pulling out, sitting back, and taking a wait and see approach.  Common sense for one person is very different for someone else.  I believe in knowledge.  The more you have, the more you can make educated decisions that feel like common sense.  So my recommendation is to read, listen, talk to people you trust, and educate yourself.  After awhile a pattern will emerge that makes sense to you so you can try to make sense of the universe.

I’m almost half way through a book that my sister told me about.  Outliers, The Story of Success by Malcolm Gladwell.  He also wrote Blink and The Tipping Point.  Outliers gives a different perspective on how people become extremely successful.  It’s a fascinating read.  How did the best athletes get where they are today?  How about heavyweights in the business world?  What is the meaning of 10,000 hours?  What does any of this have to do with you?  Read Outliers to learn more.  If you could develop mastery in one area, what would you choose?

Want more good books to read?  Check out our Recommended Reading List.

There’s a new real estate community that just launched today - epicketfence.  It started in Colorado and I had the opportunity to be the first Featured Realtor for the Colorado Springs market.  When you click on the link above, it takes you directly to the article I wrote for epicketfence.com.  Check it out if you want to learn more about what’s happening in the Colorado Springs real estate market.  If you want to learn more about the statistical details of our market, don’t miss PikesPeakFacts.com.  It’s updated every month.

I am a book fanatic.  I never read just one book.  I usually have at least a half dozen on my bedside table tabbed where I left off when I was in the mood for that topic.  When I check books out at the library I have to make sure I read them straight through or I end up renewing them or paying fines for being overdue.  So lately, I’ve been buying books more trying to keep the bookstores in business and help the economy.

I learned about a book on being a Realtor in the changing real estate market while at the CRS Sellabration in San Francisco last month.  Shift by Gary Keller.  Gary has a lot of great ideas that I rip off and duplicate - the greatest form of flattery - in my business at RE/MAX.  The other book I learned about today from Margaret Kelly as she spoke to the RE/MAX Convention attendees.  (I watched her on the web.)  The Energy Bus by Jon Gordon.  I think I’ll check that one out.  It sounds like it has a story I would enjoy and I can probably read it in one sitting.

Did you know a very small percentage of the US population reads books?  We have a wealth of knowledge from people sharing what has and hasn’t worked in their lives and businesses on the shelves of libraries,  bookstores, and online bookstores all over the country.  I learn so many things that help me in business and in my creative pursuits that I can’t imagine not taking time to sit down with a book each day.

Are you familiar with leverage?  Have you used leverage?  If you’ve purchased a home, chances are you have.  When you made that purchase did you make a down payment of 3, 5, 10% or more?  How long ago did you purchase your real estate?  Depending on that answer you have either leveraged up or down.  It’s also dependent on where you live.  Florida?  California?  Phoenix?  Las Vegas?  Michigan?  If you bought in one of those places between 2004 and 2007, you most likely leveraged down.  If you didn’t make a down payment, you may now be in foreclosure or on your way unless you locked in a fixed rate that you could afford.  If you used creative financing, you used another type of leverage and the combination can be deadly to your finances.

Leverage according to Daniel Webster is “1) the action of a lever or the mechanical advantage gained by it, 2) effectiveness, power”.  A Lever is “an inducing or compelling force”.  I like that word, compelling.  The effect of leverage is compelling.  It creates power.  It creates the power to gain or lose.  Leverage is what caused the Great Depression.  Leverage is what you use when you buy a home using a down payment or no down payment and financing.  It is neither good or bad by itself.  It all depends on the context in which it is used.

Here’s an example.  You are buying a $250,000 home and buy it with a conventional loan in the current market.  You provide a down payment of 20% or $50,000.  Now we know it isn’t going to appreciate anytime soon, but when it does, we’ll assume the average appreciation rate for the next 7 years (the average real estate ownership period) is 5% per year.  That means that in 2016 your property is now worth $351,775.  You have a gain in simple terms of $101,775.  When you divide that number by your down payment your money is now worth a little over triple what you invested.  You have made a 204% return or an average of 29.14% per year on your cash investment.  Your investment was not the purchase price of the home, it was the amount you invested as a down payment.  That’s leverage.  Is that better than a CD?  Better than the average return of stocks over the past 80 years?  Not bad.  And you get to live in the house, use it, make it your own, not have a landlord, and get tax breaks to boot.

What if you bought that same home in 2006 for $350,000 and not soon after it nosedived and when you needed to sell in 2008 you could only get $250,000.  The $50,000 you risked now is a loss of $100,000 or a 200% loss.  Again, you used leverage, but this time it didn’t benefit you.  That is why real estate, like stocks, should be considered a long term investment.  That’s why it is important to buy wisely and make sure the mortgage you get is one you can handle under most circumstances.  That’s why it is important to have additional reserves to get you through the hard times before purchasing real estate.  We just don’t know when those hard times will hit.  We don’t know when the balloon will pop or when the balloon will rise again.  Buying real estate is a lifestyle and investment choice that has to be carefully considered.  Sometimes circumstances are out of our control, but most of the time you will be able to control your circumstances by the choices you make before buying.  It does pay to be prepared.  Leverage is why the rich get richer.  That’s why paying interest on credit cards is a bad idea.  You are leveraging your debt to the benefit of the credit card company.  This market is making people think about frugality differently.  Being frugal is smart and allows you to leverage the money you have to your benefit.  Compounding is the eighth wonder of the world.  Be a winner!

So consider your current situation and how you might use leverage.  Is it a wise choice for you?  Check out the Recommended Reading List Page to find resources that will help you learn when it is and how to control more of your own circumstances.

The private banking system has done it’s job since the Great Depression, but the international potential for bank dominoes to keep falling prompted the federal government to take an ownership stake in 9 large banks as part of the bailout.  That means you and I will own a stake in these banks as citizens of the USA.  The banks involved initially are Bank of America, Merrill Lynch, Bank of New York Mellon, Citigroup, Goldman Sachs, J.P. Morgan Chase, Morgan Stanley, State Street and Wells Fargo.  These banks have agreed to limit top executive compensation and golden parachutes as part of their participation.  The federal government will also guarantee loans between banks to help create more liquidity.  This is turn should free up money to allow businesses to continue to borrow, help home purchasers secure loans, and inject credit where needed in our economy.  This action won’t create a quick fix, but should help keep the financial sector stable as we plow our way through a recession in coming months and hopefully help keep it from becoming a deep recession. 

Are you familiar with BNI? You can learn more at bni.com. Or check out the great site we have in Colorado - bnicolorado.com. I have been a member since late 2005 and was president of the Rocky Mountain Business Builders chapter from October 2006 through September 2007. Our chapter received the BNI Founders Award in 2007 and we have a great group of business people. I am happy to get up at 0 dark 30 to meet with them every Wednesday morning at 7am. If you would like to belong to an organization where everyone shows up once a week just to give you referrals :-), then check out this organization. Make a commitment to grow your business by connections with other business people that you get to know, like, and trust.

If you happen to be a BNI member and Realtor in another state or country, I’d love to hear from you.