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frugalista

Purchasing Power Of Cash

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I think the following probably describes quite a few people on this forum:

(1) Relatively cash-rich.

(2) Expect a bad recession in the UK over the next 5 years.

What do people think generally happens to the purchasing power of cash during a recession, and why?

frugalista

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I think the following probably describes quite a few people on this forum:

(1) Relatively cash-rich.

(2) Expect a bad recession in the UK over the next 5 years.

What do people think generally happens to the purchasing power of cash during a recession, and why?

frugalista

I imagine the relatively cash-rich would be in a strong position during a mild recession, although the situation would be different in all-out economic melt-down.

There was quite a property boom after the French revolution - hyper-inflation saw people rush to put their money in tangible assets like land.

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Cash is king in a recession.

By the very nature of a recession, the economy shrinks and the future-values of may asset classes are likely to drop or become more uncertain (and therefore risky).

I run a business and one of the first questions we ask when we are targeting clients is whether they have the money to spend. No money=no sale and hence no interest from us. Yep. Cash is it.

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Well, there's no doubt that those with cash are in a very strong position, and the 'why' is also easy to appreciate: it's often very difficult to gain access to leveraged funds at such times, and so those who can put together financing and complete a deal without going to use a lender have little competition.

The problem though is having the courage. Back in the early nineties recession a close friend of mine had just been appointed manager of a central London branch of a major bank. At that time property had been in a bear market for some time, lending institutions were still liquidating repossessed properties and generally licking their wounds, and a number of LLoyds Names were having to unload prime assets to cover underwriting losses.

My friend would ring me almost every week telling me to 'get down here' and pick up some of these 'crazy bargains'. He was having to auction off and tender property portfolios to cover non-performing loans, and you really wouldn't believe now how ridiculously cheap some of these packages were. If you could have laid out £500K at that time you would be sitting on £20m today.

But that's the problem. Who would have been prepared to lay out £500K of *risk* capital at that time? It's so easy now to look back with 20:20 vision and see the gift horse, but at the time things weren't so clear cut. I didn't have the resources I have today, but I had enough to make a deal then. Trouble is I didn't have the guts. I didn't know enough about what I was doing and (rightly) I walked away.

Just remember that the reason things get really, really cheap is because there are no buyers. And why is that? Because it looks as if things are going to get a whole lot worse. When it comes to the crunch and those deals of a lifetime are staring you in the face, you'd be surprised how difficult it is to take the plunge.

In short, know your market. If you know what you're doing then it's like picking up bank notes in the street. If you're unsure, walk away. You're not qualified to take the risk.

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In short, know your market. If you know what you're doing then it's like picking up bank notes in the street. If you're unsure, walk away. You're not qualified to take the risk.

I think the lesson is diversify your investments across markets.

That way you can 'afford' to take some risks.

A lot of Brits are going to get stung badly IMO because they have put all their eggs in the BTL market.

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Well, there's no doubt that those with cash are in a very strong position, and the 'why' is also easy to appreciate: it's often very difficult to gain access to leveraged funds at such times, and so those who can put together financing and complete a deal without going to use a lender have little competition.

The problem though is having the courage. Back in the early nineties recession a close friend of mine had just been appointed manager of a central London branch of a major bank. At that time property had been in a bear market for some time, lending institutions were still liquidating repossessed properties and generally licking their wounds, and a number of LLoyds Names were having to unload prime assets to cover underwriting losses.

My friend would ring me almost every week telling me to 'get down here' and pick up some of these 'crazy bargains'. He was having to auction off and tender property portfolios to cover non-performing loans, and you really wouldn't believe now how ridiculously cheap some of these packages were. If you could have laid out £500K at that time you would be sitting on £20m today.

But that's the problem. Who would have been prepared to lay out £500K of *risk* capital at that time? It's so easy now to look back with 20:20 vision and see the gift horse, but at the time things weren't so clear cut. I didn't have the resources I have today, but I had enough to make a deal then. Trouble is I didn't have the guts. I didn't know enough about what I was doing and (rightly) I walked away.

Just remember that the reason things get really, really cheap is because there are no buyers. And why is that? Because it looks as if things are going to get a whole lot worse. When it comes to the crunch and those deals of a lifetime are staring you in the face, you'd be surprised how difficult it is to take the plunge.

In short, know your market. If you know what you're doing then it's like picking up bank notes in the street. If you're unsure, walk away. You're not qualified to take the risk.

Great post :)

What's "cheap" and what's "expensive" is all relative to general sentiment at the time. Even the cheapest properties today would have seemed absurdly expensive 10 years ago and the bottom of the bear market when sometime you literally couldn't GIVE you house away, and even the most expensive properties 10 years ago would seem absurdly CHEAP to most people today.

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I think the lesson is diversify your investments across markets.

That way you can 'afford' to take some risks.

A lot of Brits are going to get stung badly IMO because they have put all their eggs in the BTL market.

Donnie,

I think this is certainly true as a general investment philosophy if you are seeking to maximise returns when you haven't time to gain experience in narrower fields.

Generally though I think you'll find the most successful investors have an intimate knowledge of particular markets and commodities, and they're prepared to invest almost all their funds exclusively in those markets. Warren Buffet is a prime example.

You're absolutely right that many Brits are going to get stung in the BTL market, but that's because most of them are green and have walked into this area with their eyes shut. Highly experienced professional landlords get a great deal of flak on this site, but such indivduals are capable of making money in both a rising and falling residential market because they're able to take advantage of weaker competitors. The amateur's loss is the professional's gain.

I guess what I'm saying is that concepts such as 'courage' and 'guts' shouldn't come into play if you really want to clean up in a falling market. If you know your stuff you're able to make a completely unemotional, dispassionate investment decision which will invariably reap rewards in the longer term.

In my experience few investors have this ability.

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Guest Charlie The Tramp

My friend would ring me almost every week telling me to 'get down here' and pick up some of these 'crazy bargains'. He was having to auction off and tender property portfolios to cover non-performing loans, and you really wouldn't believe now how ridiculously cheap some of these packages were. If you could have laid out £500K at that time you would be sitting on £20m today.

Why did you not give me a call. We could have had 10m each in the bank today, and I would have my dream Grand Banks 50 footer. :(

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Freetrader thank you.

A breath of fresh air in this clouded atmosphere.

Everyone forgets when they need to that every investment or market looks shi*e at certain points in the cycle.

Know what you know and profit, massively sometimes, head above water other times.

Or, if you are willing to mortgage your family, move your family or leave your family dedending on how profitable your ego needs to be in the prevailing market, concentrate on one profitable front to the detriment of everything and everyone else.

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Well, there's no doubt that those with cash are in a very strong position,

<Snip>

Just remember that the reason things get really, really cheap is because there are no buyers. And why is that? Because it looks as if things are going to get a whole lot worse. When it comes to the crunch and those deals of a lifetime are staring you in the face, you'd be surprised how difficult it is to take the plunge.

In short, know your market. If you know what you're doing then it's like picking up bank notes in the street. If you're unsure, walk away. You're not qualified to take the risk.

FreeTrader, you are spot on with this post.

Even those who have lived through previous property slides are struggling to remember just how desperate the situation can become.

One thing that I am certain of; relative to incomes, houses in the UK will never be this expensive again. After the last recession, house prices recovered and went on to the heights of 2004 prices. After the pain that we will all suffer (cash rich or not) in the next few years, I don't think anyone will stoke the market like they have in the past five years. "You'll never make money in property" etc.

For that reason, I believe that 'cash will be king' for a long time ahead.

Xil.

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Trouble is I didn't have the guts. I didn't know enough about what I was doing and (rightly) I walked away.

You may regret not taking the plunge but by NOT committing yourself to something you knew very little about you showed great insight. BTLS today failed to exercise the same restraint you did. I'll wager you will never find yourself in their position: facing disaster.

Who's the winner and who's the loser?

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Edited by Baz63

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Baz 63 et al.

Lets be specific.

Tell us exactly which BTL landlords will be facing disaster. When bought, location, gearing etc etc.

Justify your obvious knowledge......

I would guess he's aiming at amateur (how to be property millionaire) Johnny come lately’s. Those who have been around a while i.e. professionals will no doubt be fine.

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  • 301 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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