In this episode Kulkarni discusses what she’s noted while observing the cooling of the market in what could have easily been the second Great Depression. While she doesn’t believe in certainties and makes clear that she doesn’t have the all-knowing crystal ball in her hands, Kulkarni uses her keen observation skills and realistic outlook to dole out wise words during this all-too volatile time.

Timestamps:
00:48 | The Economy Observers
02:44 | Probabilities and Possibilities
06:12 | Warning: Volatility Ahead
09:17 | Big Flex
14:08 | Liquid Temptation
16:19 | Golden Goose Eggs and Their Baskets
20:15 | The Long Game
26:01 | Next Minute…

Resources and Links:

[00:07:31] Rather than getting swept up in the fear of the market, or the greed of the market is really kind of stepping back and saying, 'In light of what's actually happening, how could I adapt my strategy or my game plan?' 

This is Property Investory where we talk to successful property investors to find out more about their stories, mindset and strategies.

 

I’m Tyrone Shum and in this episode we’re speaking with Amazon bestselling author, chartered accountant, and founder of the Freedom Warrior program, Salena Kulkarni. In this episode we dive into what happens when fear permeates the market, what has caused it in the past, and how what can seem like the end of the world can actually be an opportunity in disguise.

Tyrone Shum:   

The property market has always ebbed and flowed and seen ups and downs, and as of June 2022, it appears to be heading towards a downward trend. This impending downward slope and the general volatility of the market is creating uncertainty among investors, which in turn is causing a lot of fear and anxiety.

Salena Kulkarni:   

[00:00:48] You and I like to say we're certainly not economists, but we're both keen observers of what's happening in the market. It's really fascinating to me to observe just how rapidly the market is cooling, and how much fear has already kind of imbued itself in the market in really just a very short space of time. Things like inflation and other interest rate hikes and things like that. 

 

[00:01:21] The news of those kind[s] of bits of information has been around for a few months now. And yet, all of a sudden, we're seeing the impacts of the kind of sentiment in the market starting to really hit home. And people are doing all sorts of crazy things right now. And there's definitely a lot of fear sitting in the market.

Tyrone Shum:   

[00:01:43] Do you think that's driven by... like, what kind of factors do you think drives it? Because the thing is, let's say we travel back to say, COVID time. Back in 2020, which is two years ago.

  

[00:01:55] At that point in time, we were very concerned, not knowing what was going to happen. And then literally, after a few months of people understanding how COVID [worked], the impact, and then what was going on, the market started to change. And there was a lot more positive sentiment.

  

[00:02:09] And in a very short space of time, there's a lot of FOMO. And the market just continually went nuts, in all honesty. Some of the things, as you've shared with me, some of the prices have gone bonkers. 

  

[00:02:20] And it just goes to show that [it] seems to be an emotional thing. Because no one knew, no one could plan it. But then somehow the information got out that, 'Okay, this market is rising, so people should jump on the bandwagon'. 

  

[00:02:28] Do you think that this is all driven by, maybe perhaps [the] media? Or maybe it's people's fear and emotion? Like, where do you think this is initially driven from?

Salena Kulkarni:   

[00:02:44] It's a really interesting thing. You know my views on crystal ball gazing. I have a very high level of scepticism around all the people out there predicting with high certainty what will happen. I just don't believe in talking in certainties.   

[00:03:00] But I think it's worthwhile— if you are serious about your investing— focusing on probabilities and possible outcomes. And in terms of what happened over the last couple of years, the big unknown that kind of sits in the space of economics is we just don't know what levers the government is going to pull. We don't know what rabbits they're going to pull out of the hat. 

  

[00:03:25] And frankly, if the stimulus package hadn't been at the level that it was at for the last couple of years, it would have been something on par with the Great Depression. Everyone's aware that that could have happened. 

 

[00:03:39] So I think if you think back to sort of March 2020, it was panic, for a very short period of time, followed by this period of time where clearly the government was putting their hand in their pocket to try and stabilise.

  

[00:03:56] And then within about six months, it went from fear and panic to almost like jubilation of 'Everyone should jump on with all this extra money that they've got'. 

  

[00:04:07] So I think your biggest job as an investor is pricing risk. You've got to pay attention to what's happening in the market. And I think people pay too much attention to extreme events. And then you get this herd mentality of just mass market panic, or mass market greed, whichever way it goes.

Tyrone Shum:   

[00:04:36] It's interesting, because that's the thing. This is history repeating itself. And I remember when I was going through the times of, say, for example, the Internet boom and then the bubble and that causing it and the GFC and so forth. There was always going to be some kind of slowdown or downtrend. Because when the GFC for example, hit, a lot of people got caught out and unfortunately had to sell or [were] in really, really desperate financial situations and they didn't really have much buffer. 

  

[00:05:02] When I looked at that opportunity— and this is something that I was looking back at as a kid, because [the] GFC happened when I was still a kid and I didn't really have much money or anything really to spend to get involved into the market— but I realised [if] this kind of event happened again, or similar events like that happen[ed] again, I look at it being from an opportunity perspective. 

  

[00:05:21] Because ultimately, you want to be prepared for these kinds of things that happen. And I guess, at this point in time, when we're looking at what's happening in the market, I think it's just, once again, herd mentality. 

  

[00:05:33] Because if you look at the fundamentals of some of the properties, and what people have, a lot of it should be able to ride out waves like this. This is just another dip in the market. And then depending on how long the actual cycle lasts for, it will just be another time. 

  

[00:05:49] And I guess this is where we've got to understand from a psychology perspective, or a managing emotions perspective, how we can actually ride this out. Because if it is going to be turbulent times ahead, how do we actually look at managing those emotions and ensuring that we can actually get out here without being in carnage, per se? What are your thoughts on that?

Salena Kulkarni:   

[00:06:12] The observation I would make is that I think events are just events. I think it's what the market makes it mean, that drives the market. I think we talked about this the last time we caught up, inflation is at a 40 year high. There's a huge war brewing. The threat of interest rate rises that are going to continue is going to make cost of capital for business very expensive, and potentially could really threaten the foundations of many businesses that rely on any kind of borrowing. 

 

[00:06:48] I think commodity and share markets are already showing those signs of volatility. Consumers and investors are definitely nervous. But I think that history has shown that during these periods of transition, most people are looking backwards with optimism that the government will rescue the economy. And my response is: Maybe they will, but maybe they can't. Who knows? 

  

[00:07:17] So I think the big takeaway for investors— and we've sort of talked about this a little already— is that this is a point in time where it's really vital to be consolidating our wealth, and positioning for more caution. 

 

[00:07:31] Rather than getting swept up in the fear of the market, or the greed of the market is really kind of stepping back and saying, 'In light of what's actually happening, how could I adapt my strategy or my game plan?' 

 

[00:07:50] One of the things I hear from a lot of investors is they have an idea in their head of the strategy or the asset class that's going to get them to where they want to go. And they hold on to it. Like, it is the way. It's the only way. 

 

[00:08:07] And what I've witnessed from having spent time with people who I regard, as some of the best investors in the world, is you've got to be adaptable. You've got to be flexible in your thinking. And it's the people who are inflexible that actually suffer the most.

Tyrone Shum:   

[00:08:23] It's a really good point, there. Let's sort of delve a little bit deeper on this being flexible, and also looking at your game plan. 

  

[00:08:30] So in a time like this, where there's going to be a lot of volatility, we should be looking at, okay, how do we sort of change our mindset to be able to go, okay, what can we do to make sure that we can ride this out? 

  

[00:08:43] Do you have any strategies that we could share? Maybe even use an example of maybe even one of your clients that we've been looking at, and how they've actually been able to sort of put together something. 

 

[00:08:56] And we're obviously not giving any financial advice or legal advice or anything like that here. It's more sort of just a high level, just understanding how to sort of look at the bigger perspective on— potentially, if you're in a similar situation like this— how you could probably potentially look at strengthening yourself to be in a better position right now, especially during the volatile times.

Salena Kulkarni:   

[00:09:17] One of the examples that we talked about at our event a couple of weeks ago, which really talks to this point of flexible thinking, was this idea of 'If if I had asked you to name the highest grossing actor of all time, who would you have guessed?' 

  

[00:09:33] And people guess people like Tom Cruise and Julia Roberts and Tom Hanks and people like that. And the award for that actually goes to an actor who never won an Oscar and hasn't actually made that much money per film. And that was our good friend Samuel L. Jackson, who's generated more than $20 billion and done even more than that in cameos and voice acting roles. 

  

[00:10:01] And that's because of his capacity to be flexible about what kind of actor he was. He's had a career spanning more than four decades, just because he's had stamina and flexibility. 

  

[00:10:14] And part of being a successful investor is partly just turning up. Actually not sticking your head in the sand and looking for opportunities regardless of market conditions. 

  

[00:10:27] But I guess the example of flexible thinking in today's environment is really about saying, 'Well, let's say for example, you're an investor that has historically done very, very well with something like commercial property'. And you have— and I've talked about this before— like, one killer property in amongst your portfolio that generates the lion's share of the income. 

  

[00:10:54] And then something happens outside of the control of the property market. Particularly to do with the business world or supply chain or world wars or things like that that causes that tenant to go bust, or just they can't pay the rent or whatever. 

  

[00:11:17] From a portfolio perspective, that could potentially be viewed as a huge vulnerability for someone. And I know that from a flexibility point of view, sometimes it's about just reading the market and saying, 'Well look, there's more than one thing going on right now. Maybe I need to mitigate that risk'. 

  

[00:11:38] So I think that the idea of flexible thinking is just not being dogmatic about your way being the right way forever, and a day. And just being able to kind of take what's available in the market in terms of information and assume that markets, like life, they're constantly changing. And trends do change. 

  

[00:12:05] I think if you think about how markets change, if you look at the last five decades, there have been so many strategies that have been in vogue, and then out of vogue. We talked about venture capital was a huge in vogue asset one decade, and then the next it was out of vogue.

  

[00:12:05] And then one minute commodities bare in a glut, and the next they're in a shortage. And then diversification works until it doesn't. And concentration is an advantage 'till it's not. So all those sorts of things.

Tyrone Shum:   

[00:12:40] Yeah, it's really interesting. And I really liked what you said about that particular example is just to be flexible in that sense. And I guess what I'm trying to sort of also tap into and understand is— especially in a volatility, like this market— there's so much fear from all the upside that's been happening, people are sort of still on that mindset going, 'Oh, wow, we've made so much money in the last couple of years', depending on where you purchased or what you bought, or whatever. 

  

[00:13:06] But then the market could potentially keep going up. Just maybe a short period. But at the same time, they're also uncertain. And then, you hear all these stories about people being fearful. So they went out and just sold out what it is right now. 

 

[00:13:17] And I think even some people have sold it on the market for, like, 20%. And that's insane. Because the market doesn't move that fast in such a short period of time with regards to property, it's usually a slower type of market. 

  

[00:13:29] So I guess what I'm trying to understand is: Why are these things happening? And maybe from our perspective, as an investor, we should probably be trying to be level headed. Keep our heads screwed on. 

  

[00:13:41] Because if we act on emotion, things obviously can get out of hand, and you can just go and basically sell this thing. And in, say, five years time, you might look back and regret it. 

Coming up after the break, Kulkarni dives into why flexible thinking is so critical…

[00:15:39] And COVID completely ripped the rug out from under them. And now they've got tenants, they've just gone back to traditional, family or whoever. But it completely shattered the gameplan that they had in mind for retirement. 

How her style of deal helps her have the upper hand…

[00:21:41] But where I see alternative as having an edge, if you like, in this market, is predominantly the sorts of deals that I'm interested in. 

She explains why sometimes it’s worth the risk to let your emotions take the lead.

[00:27:30] And one month after making that comment, COVID hit, and he dumped a lot. And those stocks have since recovered. But there's two ways to look at it. 

And that’s next. I’m Tyrone Shum and you’re listening to Property Investory.

Liquid Temptation 

Tyrone Shum:   

Kulkarni suggested for my situation that I prepare ahead as much as possible, which is advice she recommends everybody takes on in case the tides get rough.

Salena Kulkarni:   

[00:14:08] I think when people become panicked, the first thing they want to do is be as liquid as possible. So the temptation is to sell up everything or to pull money out of investments and just sit on the cash. And there's an element of conservatism in that that's probably bang on. 

  

[00:14:26] But you just want to be asking the question around your motivations for selling investments, if you are doing that. If you feel that it's just because you think the market's gonna tank and just because I just want to be out, or whether it's a recognition that you hold a specific property or an asset that maybe if the market were to go to custard would really hurt you overall. 

  

[00:14:53] And I think that trying to make good decisions In a time when maybe... there's nothing terrible has happened as yet. It's all speculation about what will happen. But now is time to just be battening down the hatches and making some good change.

  

[00:15:12] In terms of an example of someone, I know a couple who bought 15 homes in one suburb, just opposite the university. And pre-COVID, they were absolutely raking in the cash flow. Like, they were making more than two salaries' worth of income, net, after expenses, pre-COVID. 

  

[00:15:39] And COVID completely ripped the rug out from under them. And now they've got tenants, they've just gone back to traditional, family or whoever. But it completely shattered the gameplan that they had in mind for retirement. 

 

[00:16:00] The other side of that is that if they were hanging their hat on that income to support something else in their life or the rest of their portfolio, that's where there's potentially problems for investors. And that's where the flexible thinking really matters. 

Tyrone Shum:   

[00:16:19] Not saying I really like the example in terms of the idea of how that happened. I guess what I'm trying to also think about it is, then, what is it that we can do to mitigate this kind of risk? 

  

[00:16:31] Because that's a good example. Because obviously, they were relying very heavily on those students to be able to generate the income. And anything can happen. Tomorrow the market could just completely plunge. And do you go fearful and go, 'Okay, I better sell a ring just to catch up'. 

  

[00:16:46] But then you're selling at a very low point in time, compared to before, and therefore you'd be stuck. Because you've got assets. And it's like your golden goose that you've literally sold when it's generating producing income, and you don't want to lose that. And I guess that's where, as you said, flexibility. 

  

[00:17:04] And also, potentially, this is where alternative investments come into play, because it leads to help you provide that buffer. Because, say, instead of actually having 15 properties in that area that's close to the university and so forth, they may have split their assets up and done maybe 20% in long term investments, and then some other percentage in something else. 

  

[00:17:23] And that would help them diversify, because if COVID hit once again, at least they don't have to be reliant on those just 15 properties when they're going to actually have alternative investments potentially, in that. 

  

[00:17:33] Is that something that we could delve into? Because I think that would sort of give people insight in what we're trying to do right now, in terms of our strategy. Especially for myself. I split a lot of mine now, just learning from you, Salena, that it's actually wise to actually not have all your eggs in one basket, because that's what I've done in the past. And I've learnt a huge lesson from that. 

  

[00:17:51] So I mean, that's something I would love for listeners to also learn from, because it's also very valuable. Because ultimately, you don't want to put everything into one basket and spread the risk or spread [it] out [in] multiple baskets to ride the buffer out.

Salena Kulkarni:   

[00:18:03] What I would say to people is that I don't think either of us are saying alternative investments are a silver bullet. But I think that they have a nature which makes the ones— the way that we do it anyway, where you're talking about investments backed by real property— they can have a much higher immunity to volatility. And that's ultimately, in times of a bear market, that's incredibly valuable.

  

[00:18:34] And so for me, one of the things about traditional Australian and New Zealand property is that we are banking on a rising market to succeed. Apart from this example of this couple who really had quite a lucrative cash flowing strategy, most of us are buying property, and we're happy to tolerate either poor or negative cashflow because we want to build wealth by growth. 

  

[00:19:03] And regardless of who you are, there is always some level of speculation in that model. And most investors don't actually recognise that, that there is a an element of speculation.

Tyrone Shum:   

[00:19:15] I think it's full of speculation, because you are praying and hoping. You don't know which part of the cycle you're in. Like, I'll give you an example. My father did exactly that. He bought out at the top of a cycle, back in 2000. [He] bought a beautiful location property in Sydney. And he overpaid for it at that point in time, because it's just like the current market we're going through, prices went bonkers. 

  

[00:19:36] And then literally, when the market sort of tanked or start to plateau out, he couldn't hold on to that property. Like, he tried holding it for five years, but after about five years, he had to sell it. 

  

[00:19:45] And then literally two years after that, which is towards the end of that cycle, it went dramatically. So I mean, numbers, wise, he basically bought [it] for $800,000, sold it for $600,000. And then two years after he had sold it, it went up to $1.5 million. 

  

[00:19:58] And I was like, 'Ouch'. That is a typical thing. I mean, that was what my father was praying and hoping [for], that it'd go up. But he couldn't hold it for long enough, because he wasn't able to fund that. It was quite a lot of cash flow out of his own business as well. So yeah, [that’s a] typical example.

Salena Kulkarni:   

[00:20:15] I think that's a great example. And what I would say is that I think most investors should be playing the long game. And although I've said there's a level of speculation, I think over the long term, it's still an asset class that will rise and certainly one that everyone should be doing, in order to build their net worth. 

  

[00:20:37] I think where alternative investments for me have a place is once you have a reasonable amount of capital behind you, diversifying into investments which deliver pretty boring, predictable cash flow, can often offer a level of comfort during bear markets. 

  

[00:21:03] So right now, for example, as the market in many strategies starts to slow, potentially could pull back. [It] could pull back in a small way, [or] it could pull back in a big way. Those investors that are playing the long game are probably less concerned, provided, they've got adequate cash buffers, and they can ride out any crisis. 

  

[00:21:28] It's those that maybe who have over leveraged or who are really redlining their finances in order to be investors that are going to suffer or struggle. 

 

[00:21:41] But where I see alternative as having an edge, if you like, in this market, is predominantly the sorts of deals that I'm interested in. There's no ground up construction, there's no hoping the market will rise, they're deals that are already cash flowing today. 

  

[00:22:00] And my experience from having invested very heavily in alternative during the global financial crisis, was what I witnessed in the alternative spaces, that cashflow just was relatively untouched. Because if you're investing in an affordable housing kind of section of the market, people have to have somewhere to live. And so nothing much happened to the income streams, even though valuations dropped. So I just think it's a, it's another feather to have in your cap, in terms of just protecting against volatility.

Tyrone Shum:  

[00:22:35] I like that, that's the thing. Because ultimately, if you have that consistent, regular passive income that's coming in, that gives you a cash flow to be able to fund your current investments if it's currently needing support from you. 

 

[00:22:50] But if your investments are currently throwing out enough cash flow that you don't even need to service it out of additional investments, then that actual passive income can actually help you build up more cash to be able to reinvest for new opportunities in the future. 

  

[00:23:02] And that's the beauty of doing that, is that you're diversifying, not just locked into just a portfolio of properties in say, Australia, where it's returning maybe, like, a 2% or 3% return. 

  

[00:23:13] And those ones obviously will have its own, hopefully, buffers in place to be able to service it. But you're never gonna be able to live off those in passive income unless you pay them down. And even then, it doesn't seem to make sense, in my opinion, that you could rely on that passive income from those properties, because the return isn't very great. 

  

[00:23:30] In Australia, particularly, that's why we look at alternative investments to be able to get a bit higher return so that your money is working harder for you, [and] at the same time reducing the risks and mitigating any of those short term fears or changes in the market, which is what the dip is happening right now.

Salena Kulkarni:   

[00:23:48] I think the push in the market right now is that people want to create more robust cash buffers. I think when you're in a really upward swing, from a trend point of view, it's really easy to say, 'Well, I don't really need to sit on all that much cash'. 

  

[00:24:04] And in fact, the attitude that a lot of investors have is, 'Oh, my God, opportunity cost, I could have made x thousands of dollars over there if I'd had that invested'. 

  

[00:24:16] But when the market starts to wobble, when you're looking down the barrel of some pretty significant world events that will undoubtedly have an impact on the market, then suddenly, the push to keep some money in the bank, to keep some money in your back pocket becomes really important.  

  

[00:24:36] I'm not at all trying to judge or shame anyone that needs to sell right now to create more liquidity. And maybe some of the heavy discounting that you and I were talking about before that we're seeing happening right now in the market, it's not really showing up in the data yet. And I think that's because there's a bit of a lag. But I understand why people might want to push towards having greater cash reserves. And I think that's prudent in the current environment.

Tyrone Shum:   

[00:25:06] And that's the thing. I mean, I'm the same. I am looking at the moment, because I've got quite a lot of invested heavily in alternative investments. But obviously, for the next few months or so, I'm just going to sit back and wait and watch and see what happens with the market as well. 

  

[00:25:21] Alternatively, obviously, I'd like to probably keep reinvesting my funds as soon as they will mature, because I don't like having cash in there. But I think this is prudent to be able to make sure that there is cash sitting available. 

 

[00:25:33] I actually wanted to just add one point as well. Previously, we talked about Warren Buffett, and I think from memory, there was a particular thing that you mentioned in that intensive seminar not long ago about what happened just before COVID, Warren Buffett. And I'd love for you to just share with the audience that kind of analogy, because I think it was just very important for people to understand that emotion does play a part. But you've got to also understand how that works.

Salena Kulkarni:   

[00:26:01] The real premise of the event that I ran was really to say to people, 'Now is the time to be making the difficult decisions around getting your investment portfolio in order so that if and when things go south, you're made the tough decisions already and you're not trying to make them on the fly'. 

  

[00:26:27] And one of the misconceptions is that we look at people like Warren Buffett, and we say, 'Well, he never steps a foot wrong. He's really steadfast, he certainly kind of speaks to being very stable in his decision making'. And certainly, if you look over the last five decades of his investing, there have been many moments where people have kind of been flummoxed that he's held on to an investment that might otherwise be perceived as a dog, and then been proven that he's actually done very well in the long term. 

  

[00:27:02] But I think that— and I actually heard this story from Morgan Housel, who basically was describing that— even Warren Buffett can be very emotional. It doesn't happen often, but it can happen. So the story went something along the lines of pre COVID, he was quoted as saying, 'I will never ever sell my airline stocks'. 

  

[00:27:30] And one month after making that comment, COVID hit, and he dumped a lot. And those stocks have since recovered. But there's two ways to look at it. 

  

[00:27:45] Number one, you could argue that Warren Buffett has just demonstrated flexible thinking, and has made a decision given the current environment. And if you look at it from that perspective, you could argue the writing was on the wall, there was a good chance that those airlines were going to maybe go bust. So he dumped the stock. So there's an element of flexible thinking. 

 

[00:28:10] But the flip side to that is for him, and given everything he says, yes, that was an incredibly emotional decision to have made for a guy who says he never sells and rides these things out. 

 

[00:28:23] So I think no one could have predicted the implications and the ripple effects of COVID. And so you just have to make the decisions based on the information that you have. 

  

[00:28:37] And so I think one of the concepts we talked about is this hyper realism, and being hyper realist. And what that means is looking at what is actually happening and making good decisions, rather than saying, 'Well, nothing much has ever really happened'. Like, even during [the] GFC, the wheels didn't really come off our economy. But there were reasons for that. 

  

[00:29:00] And I just think that the point in time, the point in history that we are at right now, is a real crossroads. And I think if you are assuming that the government will carry us through this or that world politics, will figure it out and it'll be business as usual, I think that's a little bit naive. I think there's definitely things happening now that have happened before. But I think the fact that they're all sort of culminating at a similar point in time just makes it extra scary. And I just think it's important to just be extra vigilant. 

  

[00:29:38] And we talked a lot about the opinion that's out there right now from an economic point of view. And there's two really loud sets of voices. One set that are going, 'This will blow over, it's business as usual'. And the other one saying, 'No, we're looking down the barrel of something much worse than the Great Depression'. And the truth is, we just don't know.

Thank you to Salena Kulkarni, our guest on this special episode of Property Investory.