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Recessions are tough on the economy. Investment activity slows, credit is less accessible, and well-paying jobs become scarcer. However, recessions also tend to be when savvy people become wealthier. Bottom line question: Who are the winners during a recession and why?
People who seek value
When recessions hit, assets become less expensive and bargains are more plentiful. There is something called the “hot hand” fallacy. Basketball fans typically believe that someone who has made several shots in a row is more likely to make the next shot. People think the same thing in business. If real estate or stock prices increase for several years in a row, people think it will continue indefinitely. However, the past does not guarantee the future and it isn’t always smart to buy assets when the market is hot. Some of the best investments are made when the market is down. The key is to focus on value, not just price. Price is dynamic but value is constant.
People who offer value
By the same notion, if your business offers value, people will seek you out. Apple launched the iPod in 2002, after 9/11 and the dot com crash. It offered a cheaper alternative to buying CDs or attending a live concert. It helped propel Apple into the behemoth it is today. Service businesses can do the same. Companies that provide great service at a fair price, and treat their customers like gold, will thrive in a recession.
People who use data while others follow the crowd
Most people don’t think for themselves. They do what is popular and what others are doing, which is why I don’t like cryptocurrencies. They are purely speculative. There is no quantifiable way to determine value…but there is a lot of hype, and even smart people get lured by hype (see FTX). Value investors find value by understanding and analyzing data.
People who remain calm when others panic
Is now the right time to start a business? Most people don’t have the confidence to follow their instincts when the market is soft. People who thrive during a recession are calm and composed. They follow the data and their instincts and are not influenced by hype or panic. They have the capacity to think clearly when others have their judgment clouded by emotion.
People who think long term
Warren Buffet was once asked if investment philosophy is so simple, why doesn’t everyone do it? Buffet responded by saying “Because nobody wants to get rich slow”. During a recession, asset valuations are usually volatile in the short term, but those who can think long-term will see opportunities where others only see risk.
A crisis is a terrible thing to waste, and although I don’t think we are in a full crisis, we are heading toward a recession. It will take 12-18 months for things to settle down. Most people don’t have the stomach for the rocky road ahead, but those who provide value, remain patient and make decisions based on data and long-term objectives will thrive.