Editor’s Note: It’s “build your own financial empire” week here at Casey Research.
Each day this week, in place of our regular daily market commentary, you’ll receive an essay with proven strategies on how to build a lifetime of crisis-proof, inflation-proof wealth. Click here if you missed yesterday’s edition.
Today’s essay is part of the “field guide” we send to every new reader of our flagship research service, The Casey Report.
PILLAR #3 of your personal empire of wealth: The accumulation of income-producing real estate
Farmland…strip malls…hotels…timberland…self-storage facilities…apartments…single-family housing.
These are all examples of income-producing real estate. And they can all have a place in your wealth plan.
Real estate is a time-tested wealth accumulation and preservation vehicle. It never goes out of style. People will always need places to live, to shop, to store things, and to grow food.
Mankind’s permanent need for real estate makes it an ideal component of your investment strategy.
If the price is right, we’re happy to buy property on the wrong side of the tracks. Fortunes have been made by owning property you’d rather not walk through late at night.
But we prefer owning “trophy” real estate assets. We prefer owning the world’s top shopping locations, resorts, and apartment buildings, and its richest farmland.
The best real estate has a way of never going out of style that property in the ghetto doesn’t have. This makes it a better vehicle for long holding periods.
For example, the Las Vegas Strip is one of the most valuable stretches of real estate in the world. It generates billions in annual revenue. The next time there’s a fire sale in Las Vegas real estate, we’ll be buying real estate there directly or through ownership stakes in Las Vegas casino operators. We can say the same about New York’s Fifth Avenue, Hong Kong, South Beach, or penthouses in Buenos Aires.
Just as we do with any asset, we look to buy our real estate at fire sale prices…the kind that are present during a crisis.
PILLAR #4: The accumulation of ownership stakes in world-class natural resource deposits
There’s a good reason people always fight over the vast oil deposits of the Middle East.
Large, accessible natural resource deposits are among the most valuable assets on Earth. Ownership of these assets brings enormous wealth and power.
Modern economies simply can’t run without awesome amounts of oil, coal, copper, platinum, uranium, corn, rice, lumber, and iron ore.
Because these natural resources are so important, they’re often a matter of national security. The world’s richest farmland, oil fields, and base metal deposits are called “strategic assets.” Entire armies will rise to defend them. They will always have value. And from time to time, you can buy them for ridiculously low prices.
This is because natural resources like crude oil, copper, and natural gas are “cyclical.” This means they go through huge booms and busts. One year, the price of a natural resource will advance 50%. The next year, it will advance another 50%. The year after that, it will plummet by 60%.
This “boom and bust” price action is in stark contrast to the steadier price action of “noncyclical” assets like shares of fast food chain McDonald’s or healthcare giant Johnson & Johnson.
Natural resources boom and bust because of their unique supply/demand dynamics…
When the price of a commodity soars, it encourages a lot of new production. The producers of the commodity will always want to cash in on the good times. This increases the supply of the commodity.
The soaring price also encourages consumers of that commodity to search for cheaper replacements. This decreases demand for the commodity. For example, if the price of gasoline soars, you’re more likely to take the bus or cut down on car trips.
This increased supply/decreased demand dynamic acts as a double whammy on the commodity price and produces a bust. It’s not uncommon to see a commodity drop 50% in price in just a year. For example, from mid-2014 to early 2015, the price of crude oil dropped 60%.
A commodity boom is the mirror image.
When the price of a commodity is very low, it discourages production. After all, why ramp up production if the price is in the toilet? Low prices also encourage consumption. For example, you’re probably going to drive more if the price of gasoline plummets.
This decreased supply/increased demand dynamic produces a commodity boom. For example, it caused the price of copper to soar from $0.75 per pound in 2003 to $4 per pound in 2008. Since natural resource producers are leveraged plays on a commodity, top copper miner Freeport-McMoRan soared from $3.50 to $50 per share during this time (a 14-fold increase in value).
As bargain hunters, we look to buy natural resource assets after busts. We buy when we can get a dollar’s worth of assets for 20 cents. Believe it or not, these deals occur from time to time.
Editor’s Note: In tomorrow’s edition, you’ll learn how to “lawyer-proof” your life…and how a small investment in the right early-stage business can produce 100-to-1 returns.
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