It’s a Happy New Year?

The Dow racked up impressive gains on the first trading day of 2012, jumping up over 200 points in early trading.  Therefore, all must be well in the world . . . right?  2012 is going to be a good year?  The leaky boat is fixed?

It will be a great year if you know what you are doing.

If you don’t, then prepare for more pain.

The first key is to understand what is going on in the world.  And no, the world is not suddenly rebounding with the joy of a strong economy that will “lift up all boats.”

What’s going on in the world is this: a lot of treading water and praying.

I’m in Park City, Utah this week and I’ve met with a number of real estate agents out here.  My family and I come out here three or four times a year and I’m interested in buying a property.  I wanted to get a feel if the prices here have stopped plummeting.  They haven’t.  The market for second homes continues to be devastated.

Why?  Aren’t interest rates lower?  Haven’t real estate prices already been crushed?

That has nothing to do with it.

The key to understanding a situation, in this case the second home market in Park City, is understanding what is going on with the main source of buyers of second homes.

And the main buyers of second homes in Park City are business owners.  It wasn’t too long ago that they had comfortable margins which meant free cash flow for the owners to do with what they wanted.  And a lot of these owners decided to buy second homes.

And why not?  Aren’t second homes supposed to be a good investment?

Today, that’s not the case.  Many of these same owners have managed to keep all of their employees, but are now just breaking even on the business.  And they aren’t too sure how 2012 is going to fare.  In fact, more and more of these second homes are expected to be put on the market for this very reason–uncertainty about the future.

There is a big difference between pulling only a salary out of your business and having a pile of extra cash at the end of the year.  With a pile of extra cash, you don’t worry about costs.  The money keeps coming in the door.

Made an investing mistake?

No problem.  More money is flowing into the business.  A rental property has more expenses that income one year?  No problem.  Throw the extra cash generated from the business at it and be on your merry way.

But when that spigot dries up, all of the fun things purchased during the good times don’t go away.  They still have to be maintained.  They still cost money.  In the good times, extra cash was always there to cover the overhead.  In the lean times, if the property can’t pay for itself, it becomes a real burden.

These are the kind of situations that are happening all over the U.S. – hell, all over the world.

Business owners in Europe are now experiencing the same thing.  Uncertainty has a habit of reigning in spending.  And if spending ain’t happening, the tide goes out, leaving all boats to rot on the shore.

The key with surviving and thriving in 2012 is patience and understanding.  Patience to do your own research, to not opt for the easy way out . . . to not jump into things that “sound good” or that you read about on the cover of Newsweek.  Those are sucker plays.

In 2012, the money is going to be made by the people who take the time to understand what is going on.  Whether it’s a niche opportunity like Park City real estate (be patient and wait another year), or an investment in the stock market.

For the stock market, the upside is limited.  Yes, there is a ton of cash sitting on the sidelines, especially in the large funds.  But they, too, don’t like uncertainty.  Look for this money to flow into large, liquid assets — and the #1 candidate for that is bonds.

One of my favorite plays for the first half of 2012 is being long TLT.  This represents bond prices and moves up as bond prices also move up.  This is a place to park cash.  Let the price of TLT rise while you gain patience and understanding for the next big opportunity.

Successful investing,

John Frederick Carter

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