Are we in a recession?
Not officially.
Despite record unemployment, a dramatic shrink in GDP, and countless businesses on the edge of bankruptcy, we’re not in a recession. Yet.
By most analysts’ definitions, an economic downturn must last for one to two quarters before it can be labeled a recession. This doesn’t mean we’re not in one. It just means that a recession hasn’t been officially declared. That is likely to change very shortly.
So, how can you survive, and even thrive, during this financial crisis?
It’s not going to be easy, and it’s going to take some creativity, but it is possible.
Keep in mind that some of the most prominent companies have been built in recessionary periods, including Disney, FedEx, Microsoft, Pinterest, Uber, and Instagram.
In that spirit, we’ll give you 5 ways you can potentially profit during this coming recession.
- React to Overreaction
Recessions tend to stem from how the population feels about the economy, not necessarily what’s happening objectively.
For example, in 2018, Tesla’s stock dropped 10% in a single day after founder Elon Musk smoked pot on Joe Rogan’s podcast. Nothing about Tesla’s fundamentals had changed. Instead, investors’ confidence in Elon Musk waned, resulting in a stock devaluation that wasn’t based on the company’s performance, but instead, sentiment.
A month later, the stock recovered (and then some) because the initial drop was simply due to an overreaction.
These overreactions are also visible on a larger scale. During the previous financial crisis, when the housing market crashed, real estate prices bottomed out, and some would argue, prices were lower than they should have been. Fear made people too afraid to buy.
As a result, savvy investors were able to buy distressed homes and apartment complexes for pennies on the dollar. In some regions, prices were below what it cost to build the actual property!
How you can profit: Prices are on the way down, but as we’ve said before, they haven’t finished falling. When they do, you’ll be able to pick up assets for bargain-basement prices. Real estate, business, and stock prices could end up at record lows. Be prepared to pounce on these opportunities.
- Understand that Wealth Isn’t Lost; It’s Transferred
Yes, a lot of people are losing a lot of money.
Most restaurants closed, and it’s estimated that 25% won’t ever be reopening.
But, people didn’t stop eating. Instead, their food demands shifted to grocery stores and e-commerce businesses like Amazon.
Office buildings are shutting down, but many office workers are still employed. They’re using videoconferencing software like Zoom to create virtual offices.
There are clear winners and losers in this economic shift.
During a recession, wealth is transferred, not lost. The key is to bet on the companies and industries that are beneficiaries of the wealth transfer.
How you can profit: Look for emerging technologies, innovations, niches, strategies, or business models that are poised to thrive during a recession. On the flip side, don’t go all-in on a plan that is dependent on a downturn to be profitable. Economies are cyclical, so be sure to look at the long term.
- Look 10 Years Down the Road
Inexperienced and emotional investors tend to think in quarters (or even days), but you should be thinking in decades.
For example, Uber, which was founded during a recession, did not open its doors as a reaction to the recession, per se. Instead, they saw an opportunity centered around emerging technologies and societal shifts, and they took action.
The concentration of the population in urban areas, the growing expense of owning a car, the advances in smartphone technology, and the massive user frustration with the taxicab industry all combined to create a favorable landscape for Uber to enter and disrupt the marketplace.
How you can profit: Look for opportunities that are recession agnostic. It doesn’t have to be an emerging technology like self-driving cars. It could be something as basic as a paper goods company that supplies households with toilet paper on demand. Or, you could find a more efficient way to connect people with the goods and services they need. The possibilities are endless when you start thinking of the future.
- Build a Solid Financial Foundation
We’ve said it in previous newsletters. It’s not possible to predict the bottom of the market. We wish it were!
Though experts can spot trends, patterns, and cycles, there could be a surprise lurking that no one anticipated. Covid-19 and the resulting global economic shutdown is a prime example. Wars and natural disasters can also have far-reaching effects that no one can predict with certainty.
By having a solid financial foundation, you can weather a financial storm. Have reserves in place, don’t live beyond your means, and resist the temptation to overleverage yourself.
During the past ten years, millions of people have been undisciplined with their money, creating sloppy financial habits that are going to expose them to default risk that could have been avoided.
As Warren Buffett famously said, “You only find out who was swimming naked when the tide goes out.”
How you can profit: Keep an eye on your credit score, minimize (or eliminate) high-interest debt, and grow your assets responsibly. By having a solid financial foundation, you’ll be well-positioned to take advantage of falling asset prices at or near their bottom.
- Act Like a Leader When Everyone Else is Afraid
Former Mayor of New York, Rudolph Giuliani, said, “It is in times of crisis that good leaders emerge.”
While others complain about the economy or play the victim card, you can take this opportunity to step out of your comfort zone and transform yourself for the better.
This strategy can apply no matter where you are in life. Whether you’re a business owner, an employee, a supervisor, or a stay-at-home parent, there are ways you can grow, contribute, and help others during this time.
How you can profit: Check in with yourself each day and ask yourself if you’re acting like the leader you know you can be. Be prepared to recognize opportunities to lead. Have confidence in yourself that you’ll know them when you see them!
