KEY POINTS:
Veteran investors in New Zealand are cautiously guarding what cash they've got in the wake of a global financial crisis they fear will be worse than any the country has seen.
Tony Gibbs, chairman of Guinness Peat Group, says while many Kiwis were hurt severely by the 1987
crash, "This is different - this is really, truly global and frankly depressing.
"There will be people who make a lot of money out of this - but unfortunately there's going to be a lot of people who lose money too."
Paul Chrystall, managing director of private equity fund manager Maui Capital, says those who will do well during the crisis are those who were principally cashed up before the crash and everyone else will be concentrating on getting rid of debt.
The peculiarity of the financial crisis playing out compared with previous downturns, Gibbs says, is the questionable safety of banks.
Worldwide, people doubt the banks' abilities - demonstrated by governments stepping in to guarantee deposits. That's because this downturn has been triggered by the financial community, he says, rather than the stock community.
"It's brought about by an overheated derivatives market, which is a banking issue, not by an overheated stock market where companies are over-geared."
However a prudent investor will still have as much as they can in a safe bank, says Gibbs, "because the markets are tumbling like crazy.
"I've been keeping my cash and my bonds close and watching them."
Shareholders Association chairman Bruce Shepherd says economic contraction will be far worse than Treasury is signalling, and when faced with recession, "it's all about cash".
"If you have enough surplus you can buy bargains, so for now, leave your money in the bank and keep your eyes open for equities that give dividends and are not vulnerable to the dividend being cut."
Astute investors will have cash in the bank offshore, most likely in US dollars, or possibly euros or sterling depending on what their circumstances are, says Shepherd.
"Most will have some exposure to the Australian dollar which is fundamentally stronger than ours."
Shepherd's portfolio is 50 per cent in private equity, 20 per cent in listed equities and 30 per cent in cash - with 70 per cent of that cash offshore.
Gibbs says he hasn't been selling stocks, but has watched them all fall and hasn't been buying. Unless you have borrowings against your shares and provided you have good stocks, Gibbs says investors should sit and hold tight. "That's what I'm doing."
But the time will definitely come when people start buying "big time" back into the sharemarket because there are many stocks that are obviously very cheap, he says. "The problem we've all got is that if you buy them now, are they going to be half the value tomorrow?"
What everyone is waiting for, says Gibbs, is when the world's big investors "wake up one morning and say, 'We've got to get back into this'." And the minute the market turns and goes back up; it'll go back up quickly.
"People say, pick it when it's at the bottom, but you don't know where the bottom is," says Gibbs. "What you do know is when it's starting to rise. Then you think about cautiously going back into the market."
Shepherd warns against investing in managed funds rather than holding your own assets during a financial storm and reckons property has a further 40 per cent to fall before he'd consider buying it.
Australian-based millionaire property investor and educator Michael Yardney says for property investors, the first thing they should do is adopt a long-term outlook, rather than having knee-jerk reactions.
"It's easy to get depressed with all the bad news about international and local economies, but remember in the long term property has always been the way the majority of New Zealanders have created their wealth.
"Over the long term, well-located properties have always given good rental returns and capital growth."
But property markets move in cycles lasting between seven and 10 years, says Yardney. The boom is usually the shortest period, while stagnant or falling price periods are normal. Prolonged booms, such as we just had, are often followed by longer or deeper than usual slumps. "The problem is, most investors have never invested during a flat period or depression, and for that reason they are fairly nervous and scared."
Ensure you can see yourself through and buy time, Yardney says. It'll take a couple of years before the market picks up, so you need sufficient cash flow to cover mortgage interest. "Sometimes one has to bite the bullet and get rid of some bad properties to see you through."
The good news is that interest rates will continue to fall for this phase - but it's unlikely rents will rise, so have a sound budget.
The next step is to take advantage of the opportunities presented - because the best profits have always been made in downturns.
"Be fearful when others are greedy and be greedy when others are fearful," says Yardney.
When there's not much in the way of capital growth to be had, it's appropriate to manufacture it.
"Look at your properties and maybe do some refurbishments - not structural, but cosmetic things that can add some value - and rent.
"New carpets, new curtains, upgrade the kitchen and bathroom - considering spending up to 10 per cent of the value of a property in refurbishing can often yield you $1.80-$2 for every dollar spent."
Refurbished properties can be re-valued and potentially drawn against to cover interest payment shortfall until the market moves strongly again.
Extra money can be used to judiciously buy bargains in areas that will out-perform averages.
The areas that pick up first are the affluent ones closest to main centres, not in the regions.
Oversupply, lack of confidence and difficulty getting finance mean prices are still falling in many areas - but this creates opportunity for anyone cashed up to buy below market price from motivated vendors.
Buy well below "replacement cost" by assuming property values will fall 5-10 per cent before they pick up.
"There are some desperate vendors who are prepared to let things go well below replacement cost because they have no choice."
Yardney says only buy properties you want to hold long term in your portfolio. While many Kiwis have done well financially from buying properties and on-selling them, a flat market is not the time for this strategy.
They need to provide sufficient cash flow to carry themselves through the difficult times and preferably be properties to which owners can add value by renovation.
This is the time to do plenty of research and educate yourself so you are ready to make money when the next boom starts.
GETTING BACK TO BASICS
Recessions are a great time, says Bruce Shepherd, because they level the ground and force people to get back to basics.
These are working out as a business how to be valuable to your customers - or for employees, working out how to be valuable to your employer.
The word's greatest existing businesses were born in the 1930s in the wake of the Great Depression, such as Coca-Cola, 3M, General Electric and, in New Zealand, Fletcher Building.
Adversity tests management and passing the tests gives the skills to be phenomenal businesses in the recovery, says Shepherd. If you're a very wealthy investor you probably won't buy public company equities or property, you'll do private equity plays for businesses struggling in the recession but with fundamentally sound value propositions.
Randal Barrett, of venture capital investing company Pioneer Capital, says unlisted companies are now priced much more realistically, and the next two to three years are going to be looked back on as good vintage years to have been investing.
"Now is a good time to be buying and we are ramping up our investing," he says.
What to look out for in private equity plays: A simple business doing something useful.
With a global value proposition.
Can do so with a profit margin.
Focused on delivering value to its customers.
Has built stable long-term relationships that effectively enable it to price its products at a premium.
Run by a competent, impassioned person with a significant shareholding - well-paid with performance-based pay.
Financed with equity - no debt.
