April 16, 2020
Whether your finances are doing well or not as the world remains shutdown, it’s an emotional time. Maybe you’re filled with dread because of the spread of COVID-19 or due to the rash of layoffs. Or, instead, maybe you’re frozen to making a move because you’re empathetic of those around you that aren’t doing as well and feel as if your own finances or well being should suffer in some way.
These conflicting emotions can lead to mistakes that can create long-term reductions in your ability to grow your finances and build your net worth. In this two-part series, we will discuss how to operate your finances, even when processing these emotions, to ensure you’re able to maximize opportunities and prevent a slide in your net worth. First up, buying value with empathy. Next week, we will delve into how to operate while afraid.
You still have your income. You have savings. You have the ability to take chances.
If you’re still healthy and haven’t had a major financial setback because of Covid-19, you’re in a fortunate place. Millions haven’t been so lucky, as you’re more than aware.
It’s an uncomfortable circumstance. You’re likely seeing deals or opportunities to buy assets that come with deep cuts in price. But you’re also more than aware of why this opportunity has come to you. It creates a situation where you’re certain you want to move forward, but you also don’t want to take advantage of this type of misfortune. People don’t voluntarily choose to sell at less than market value. The way you manage the purchase, showing a deep level of respect while doing so, can ensure feelings aren’t soured over the sell.
It’s not that you shouldn’t buy. Others are struggling and may need the funds. Therefore, they need buyers as well, which is where you fit in. For them, the cash flow is more important than the asset at the moment.
The question should be what and when should you buy? Here’s how to judge whether that distressed asset is something you should buy, while also taking an empathetic approach to the sale.
Just because it’s a good deal doesn’t mean it’s a smart deal for you. The world’s economy has shown significant turmoil and unpredictability. Incomes may slow, costs may rise and asset prices may drop further. You can’t overinvest and limit your flexibility to handle the uncertainty. Can you carry this asset if prices drop further? What will you do if your income falls or, worse, eliminated? Are you prepared if your daily bills increase? This isn’t an exercise in scaring you away from what could be an excellent purchase, but you must account for the situation, in case you may need money if things go sideways.
After all, you don’t want to be the one selling a distressed asset out of necessity.
You may have wanted that new car, stock or house for a while and it seems like a good time to buy because others aren’t. There may even be a small drop in price that looks attractive. First, ask if the true discounts to the market have had a chance to price in. What are the micro- and macroeconomic trends in your area and in the market at large? Maybe buyers have slowed, but the seller’s price hasn’t caught up to the new normal. Since the price will eventually be dictated by demand, as well as the cash available in the market, have you waited long enough for the realities of those dynamics to impact the price tag? Will there be extra supply of these items in the near future? How discretionary is this asset class? The answers to these questions all should play a role in your purchase decision and timing.
You need to know if the discounts you currently see are reflective of the market conditions. Do they accurately reflect the true price, at this point? If not, then it’s likely not worth the purchase.
What is the risk of waiting? That’s one of the simplest questions I pose when looking at opportunities. Let’s say we’re examining the price of a potential rental house. In some areas the risk of price appreciation is very high, even in this market, so you should buy as soon as you can (since the price will only go higher)! On the other hand, if there’s a high probability that prices will fall, then you should wait.
In uncertain times, your knowledge and experience in a specific market will help you determine the value of waiting. If you don’t have that experience then find someone you trust that does. It’s extremely complicated in the best of times to maximize the value of an opportunity. Using educated and well researched estimates can help you make these decisions. When looking at the current market for this house purchase, ask yourself, what’s the potential upside to waiting? The answer you’ve obtained - whether it’s worth buying now or not - will become a risk you take. But if you’re leaning strongly in favor of waiting, then listen to your analysis.
When you’re trying to take advantage of your fortunate situation, make sure to also find ways to help. Things like donations to shelters or food banks can go a long way during this troubling time. Even asking an at-risk neighbor if they need help getting groceries can do a lot of good.
But this sense of doing the right thing comes in the purchase process as well. Recently, I bought a second-hand camera from a family dealing with a health complication (unrelated to coronavirus). During the transaction, a number of accessories were added to the deal. When we priced in the accessories, they added a bulk discount I hadn’t asked for. Since I had already received an excellent deal on the camera, I decided to pay full price for the accessories (a more than nominal amount in the transaction).
It’s not always about being a ruthless shark when seeking underpriced assets. You need to apply some humanity to the situation and allow everyone to feel they benefit. My goal wasn’t to provide charity, but rather serve as a respectful gesture, since they had already sold at a heavily discounted price. Who knows, maybe one day the seller and I will have another opportunity to trade, and I just made a reliable partner if it comes up again.
Be aware that around you, people are struggling. Some greatly. Use the discount in prices to obtain assets at an advantageous price tag. But you still want the purchase to be a two-way street, where both sides benefit. It’s not just good for the soul, but it could also benefit you in the future.
By Timm McLean, MBA |
CEO at WLTH