How to Prepare for a Recession.
How to Prepare for a Recession.
"Investing is a game of temperament, not intelligence."—Charlie Munger.
This essay was supposed to be about Afrobeats and its history, but as an immigrant, I realised that there are many of my followers whom this topic might not resonate with, even though we’ve discussed it once. And, coupled with the current trend in employment, food prices, and financial markets; this essay, I believe, is the one we need more.
That said, this essay is not about investing. I am not an investor, nor do I pose as one. As always, I remain a dispassionate observer of economic and sociopolitical realities. Any insights gained from this essay that can be applied as investment strategies, should be done at the discretion of the reader.
Let’s Go!
Introduction.
Nobody cares about what you know.
Many people like to think they’re owed something by the world because of their innate abilities. And since they have been taught to think they’re special in a world where both everything and nothing is real (school), they cease to retain the desire learn, and as a result keep repeating the same worn out habits that earned them their specialty.
Suckers.
While there are many scholars who don’t let their academic aptitude hinder them from further learning and development, a thing can be said about the person that just does not care whether or not he is esteemed by others to be of supreme intellect. Not because said intellectual esteem doesn’t come with a harem of virgins waiting for the individual at his untimely demise, far from it. But rather because certain individuals have realised how easily fooled they are by their own thinking, as a result of emotions beyond their control. Wouldn’t it be much better to accept that you can’t control certain emotions, than to be fooled by them? I don’t know. But if I were to answer, I would say life, and financial markets do not give us the luxury of time to contemplate whether or not we have the ability to be sad, excited, or angry. What they do give us, is the opportunity to work, earn a living, and make decisions based on the proceeds from our work.
All things being equal, recessions; even depressions, are one of the very few things that have the ability to take a man’s work from him, regardless of his race, ethnicity, or social standing. And this, my friends, is why we are, where we are, where we are.
The following subheadings highlight insights from my ideas on how to prepare for a recession. Unlike previous posts, you might want to start from the first point before jumping around to other golden nuggets.
Learn Rational Thinking
If you grew up in a competitive environment, you would not be foreign to the desire of a young person to surpass his or her brother, sister, father or mother in worldly merits. And as far as this desire goes, there are many factors that go into its becoming reality.
Genetics aside, there is very little one can do to change one’s fate besides risk-taking, which involves sticking one’s neck out, and exposing oneself to ridicule. Sometimes the person you are up against is a heavyweight, but often times, the only differentiating factor is time, and what you do with yours is what eventually sets you apart.
Unlike parents; society, and the economy doesn’t favor one participant over the other forever (although governments might). Over the course of time, the playing field gets leveled, and every player is given a unique starting point based on his or her gifts, abilities and work ethic. Recessions, bankruptcies, divorces, layoffs, and court summons are many such situations. But the ability to get past these situations are the hallmark of those who fade away from the limelight, and those who maintain their stance. And they do this by thinking rationally.
Understanding Rational Thinking Via Negativa
To understand how to think rationally, one needs to come to terms with one’s own predisposition to thinking irrationally. Take for example; when choosing what to wear to church on Sunday, most would rather wear what makes them look good in comparison with other members of the church, than what would be appropriate for the current weather.
Rational thinking suggests that one optimize for the choice that leaves one better off in relation to other choices, but not in relation to a group. So if you’re thinking of what to wear to church, via-negativa is a mental model that suggests that you start by thinking of what not-to-wear to church.
Benefits of Thinking Rationally
Show me the incentive, and i’ll show you the outcome. - Charlie Munger.
When preparing for crisis, rational thinking helps you isolate your decision making from your emotions, but what it doesn’t do is guarantee results. To gauge the results from any given set of options, one needs to understand the probabilities that any outcome is possible. As such, one needs to understand probability.
An Introduction to Probability Theory
Probability theory provides a framework for analyzing random processes and helps us make informed predictions or decisions based on incomplete information. Probability theory is essential in fields like engineering, statistics, finance, science, and machine learning, where uncertainty is inherent.
To avoid going into depth, I would simply drop a probability formula for the math nerds in the house. I know nothing about math. As such; my rendition on this topic will be completely descriptive.
To describe what is happening in this formula, I would like to conduct a thought experiment.
Say you are given two choices; A and B, with a 50% probability of each of them occurring, what would be the correct option to choose? According to ChatGPT, the correct option would depend on factors beyond probability; like context. But strictly speaking, the correct option would be neither.
So, unless you are ready to explore a secret third option when presented with choices like this, then you are most likely not ready for probability.
Uneven the Playing Field: The Value of Work.
Work has its value among the capable, the inspired, and the valued. But among those who would rather sit by and pass judgements, work loses much of its meaning.
If you have never been laid off, had a client withdraw her commitment, or suddenly found yourself unwanted from an engagement you are perfectly capable of performing, you most would likely understand the value of work to a certain degree. But work’s value goes beyond its obvious rewards.
Setting Yourself Apart
Victim status is available to only a select few of society’s members. And the lower you are in society’s ladder, the less able you will be to claim such status, together with its benefits. Truth be told, very few people will be willing to deny a status that exempts them from having to justify being a human with long, hard labour. As we have seen in the last few years with the advent of social benefits like unemployment checks, when given an option between hard work and free money; millions will choose the later, without questioning where such funds came from.
But only a select few are willing to reject being victims of discrimination, disability, abuse, or rejection, and rise to the level of their own work.
By no means is this an easy task, as such a stance requires one to go beyond words for it to mean anything. But by no means is this also impossible.
Todays Winners and Yesterdays Losers.
Winning is what sets apart the truly exceptional from those who just work. And the beautiful part about winning is that it cannot be explained, you just feel it. The same way failure cannot be explained, you only feel the pain.
But another thing about winning is that the key to its door is in constant flux. As such, what worked yesterday may, or may not work again today. Which is why markets are important, as they are an efficient reflection of what works currently, based on votes made by people with their funds.
When the market has tilted too much in one direction and is due for a correction, there exists an opportunity for those who were once winners to win again, and for those who missed out on winning to secure a vacant spot, and if no such spot exists; create one for themselves. But there is no formula for this. Some claim to have the ability to outwork their competition, but as someone who doesn’t sleep a lot; there is not much evidence tying a lack of sleep to guaranteed outcomes.
In my opinion, the best one can do other than look for a master key that unlocks all the doors, is to figure out a combination of keys which when tried can unlock a favorable number of doors needed to achieve a desired outcome. Instead of trying to be Superman, become the Batman of doors and over time, the door you wish to enter will eventually open up for you.
Bitcoin & The Fed; Crashes—Finding out what Works.
Legacy financial institutions have been critical of the cryptocurrency space for years; throwing shade left-right and center at cryptocurrency enthusiasts. Nobody can say whether they are right or wrong as it is left for the free market to decide. But since the occurrence of several bankruptcies in the cryptocurrency space like FTX on November 11 2022, it seems the market has finally figured out what works after all, and several financial institutions have made adjustments.
On January 11 2024, the SEC approved 11 applications from listed Exchange Traded Funds (ETFs), including from BlackRock, Ark Investments/21Shares , Fidelity, Invesco, and VanEck, to track the price of Bitcoin.
A decade in the making, the ETFs are a unique commodity, that offers investors exposure to the world's largest cryptocurrency without directly holding it. And IBIT; Blackrock’s approved ETF of which JP Morgan is an authorized participant, remains the most traded Bitcoin ETF since its launch.
Although this may not make much sense to the average joe, you need to understand how money works. When large institutions move funds, or worse pool funds together; what they are doing is aggregating votes to influence how the world works. And as such, what is a $1 vote on Bitcoin means a $1 spend on infrastructure that can support an equal spend, or more. Multiplied by a billion, this means a billion dollars worth of infrastructure are financed by institutions to support an equal amount of transactions made in bitcoin.
When these systems start working, do not be surprised when you will be forced to change your payment methods, banking providers or even the stores you buy from.
Clog the Damn—What Happens when you Find What Works?
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By the time you’ve figured out what works for you, your family and your business. You will probably get one of two reactions;
Doubters will show up claiming to have always believed in you
Haters will seek to strip you of your hard work
Sometimes is both, but if you’re a reader of this publication, you will know one thing; we don’t care.
Life is a game, and like many games, there are rarely any round twos. If you lose, be sure to take your loss and move forward. But if you are fortunate enough to win?
Free Money—The 5th Industrial Revolution.
According to the man who is at the very top of the energy ladder: Jensen Huang, the CEO of Nvidia, we are at the cusp of another industrial revolution; evidently one that involves human and machine collaboration. But it doesn’t leave out the role of both public and private institutions to bring this to reality.
As Artificial Intelligence continues to sweep the market with its influence, there is no doubt it will be the technology to power the next industrial revolution. However, what is still open for speculation is what form this technology would take in order to power another industrial revolution.
Household Adoption vs Corporate Usage
Although Jensen touts the incredible opportunity that artificial intelligence presents to corporations that can afford it, even governments, I can’t help but highlight his inherent participant bias as a result of his ownership in the chip making company; Nvidia.
A benefit of the first mover advantage himself, Jensen is responsible for trillions worth of value in today’s Standard and Poor’s 500 Index. Servicing millions of customers daily with cutting edge artificial intelligence solutions. But this advantage only gives one access to the segment of the market that is willing and able to pay for the products one has to offer; corporations. Even though they might not get the most value from it, they just have to get enough to justify the amount spent. Just like Apple’s first customer was a computer store chain, so does Nvidia service corporations like Meta Platforms, Microsoft and even Tesla. But history suggests that the reality of industrial revolutions goes in an alternative direction.
New Age Rockefeller
Although the definition of an industrial revolution suggests a transition of the human economy from a subsistence manufacturing processes to a more stable and efficient means, I consider any revolution incomplete that doesn’t reach the minds and hearts of the smallest of individuals in society.
From the incandescent light-bulb, to the iPhone, several innovations powered by their respective industrial revolutions, have made their way into the hands and homes of Americans, and the rest of the world before, or after being validated by the corporate world. It goes without saying that individuals are the hardest market segment to target, but are in the long-term, the most rewarding.
As such, any individual who is able to build such an industry transforming machine, stands a chance at probably becoming the next John D Rockefeller.
Conclusion: The 6 Month Magic Pt.II
In the essay above, we discussed how possible it is for an individual to alter the direction of one’s life in 6 months. And although the principle is discussed in a separate context, there exists very little distance between the 6 months used in switching from one line of work to another, and the six months spent weathering a recession.
That said, here are a few strategies that will prove valuable in a recession.
Build an emergency fund: Although self explanatory, most people I believe, overestimate how much they need to survive. An emergency fund creates a safe haven for your activities and any unforeseen circumstance that may thereathen them.
Reduce Debt: Don’t kill yourself trying to keep up with an old lifestyle. If you cease to be able to afford it; leave it behind.
Plan for major purchases: Recessions and the market conditions that come with them give individuals with cash in hand opportunities to capitalize on unbelievably low asset prices. A cursory glance at recession stories on YouTube will reveal several individuals who still profit off of one purchase they made during a recession some 10 years ago.
Cut Unnecessary Expenses: Do you really need both Spotify and Apple Music? If you usually eat two bowls of rice, why not one?
Stay Informed: In moments of great chaos, your most valuable resource remains a steady access to reliable and relevant information that is also accessible. That said, once you have secured a trusted source, be sure to do your own research as it would also add to the credibility of your sources.
See you on the other side.