Economic Downturns – Avoid the Snakes

Economic downturns affect us more than just the financial aspect. It is known that we are living in uncertain times, and when this happens it can feel paralyzing to the point of not being able to think through things thoroughly. I am not going to lie, over the past couple of months I have hit some dark times, but I have overcome this by connecting with my mentors and talking with my friends and family. Furthermore, I have been able to go on some hikes, do some yoga, and read positive articles which has been a key to getting a level head. I bring all of this up because when you are investing and trying to take advantage of downturns, one needs to have a level head and be in rational thought. The two things that burn most people in a recession are greed and fear. I encourage everyone reading this today to focus on looking within and seeing if they have tapped into one of these two emotions in the past couple of months and if you have, take a big step back and adjust course.

Once when this big aspect has been taken care of, when investing be sure to do your proper due diligence on things that you are investing in. Now, more than ever we are seeing major discounts and big-name investments and many people may have the fear of missing out on the potential upside that these investments can bring. BE CAUTIOUS, TREAD CAREFULLY. Many of these airliners, cruise ships, or service industry businesses are trading 80% less than they normally do, but before you pile in thinking you are buying at a bargain price understand how all the pieces work together. This is not to sound pessimistic but try your best to look at the worst-case scenario of a certain asset class or market. For example, how will this virus alter the industries and the way we live going forward? Are cruises an essential business, and will they be able to stay afloat with such large debt levels? Will cruises get a U.S. bailout (likely not because they are headquartered in Central America)? Make sure to know all the potential downsides, and not to catch a falling knife.

Look up, be happy, because there is a large silver lining to all of this. We are investing in our independence, and likely will diversify our supply chain away from China. This has all accelerated the investment of technology that makes us more interconnected and has developed our communication infrastructure. Look for investments that are deeply discounted and are likely to come out of all of this being the new norm. Avoid industries that people can easily live without (we do not even want many of these stores to be honest). The retail apocalypse has been happening for years, and in this downturn, many companies will not be able to make it through the other side due to antiquated business models. A perfect example of this is Gamestop, JC Penny, Macy’s, Sears, Circuit City, Best Buy, or AMC. Do we need to purchase video games in a store anymore when you can download or order on Amazon/E-Bay? I am surprised they have survived this long, but I see them becoming the next Blockbuster. While not convenient if it does not fit, I think many clothing stores will transition to the online model over the next couple of decades when the ease of return becomes more prevalent. TV’s, speakers, and cameras in the future will primarily be purchased online, so I think Circuit City or Best Buy need to evolve their model to remain competitive in the marketplace. Lastly, as much as I love movie theaters, they are expensive to operate, and many studios are releasing directly to subscription services. They need to evolve and change their model, as this is all proof that entertainment consumption habits change with ease. All these above are examples of what to not invest in (given their current trajectory).

I write this article not as a bear, but as someone who understands many companies will go under, and may not survive the wreckage. Many company’s that have been running poor balance sheets and haven’t evolved with the times should go bankrupt without a bailout. In the business world, this is just how it is, and while many people’s jobs rely on the income from these bankrupt companies, other more meaningful opportunities will arise for them. Why is it that the average tenure for companies on the S&P 500 is around 20 years? Over a couple of decades, companies get comfortable and get delisted as times changes, consumer preferences change, and industries evolve. Be careful where you invest, as we are living in a dynamic time of rapid change and ever-evolving consumer preferences.

-Published 4/25/2020


Disclaimer:
Nothing stated in this article is a recommendation from Forehand Financial to buy or sell a particular security or asset class. You should wisely consider your tolerance for risk, time horizon, and financial goals before making an investment. With investing, you run the risk of losing money, always read an investment prospectus and make an informed decision before allocating capital to a particular investment.  

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