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Don’t Retreat In The Face Of Recession

Change is coming. It’s inevitable…

The signs of recession are all around, and it’s not just the talking heads on the fringes sounding the alarms anymore; it’s prominent business leaders, fund managers, and economists now issuing dire warning signs about what’s to come.

Here is a sampling of what these prominent voices have to say:

Elon Musk says we’re already in a recession that could last until spring 2024, and only the strong will survive. (Yahoo)

Is a global recession coming? Experts raise the alarm. Figures, including the head of the World Trade Organization and Paul Krugman, are concerned about the economic outlook. (Politiko)

‘Batten down the hatches’: Bezos is the latest business titan to warn about a recession. (Fortune)

‘Run, don’t walk’ from index funds, says a hedge fund manager who ran one of the best-performing mutual funds. He explains why most funds aren’t ready for a two-stage bear market that could last over a decade. (Insider)

Besides warnings from famous talking heads, concrete economic indicators also signal the alarms. One of the most prominent ones reared its head recently. The recession indicator tracked by Wall Street that is growing louder is the so-called “yield curve.” (New York Times)

The yield curve compares interest rates on different maturities of government bonds from a few months to 10 years or more. Investors typically expect to be paid more interest for lending to the government for long periods. However, when investors feel the economy is on shaky ground, they will demand higher interest rates for bonds of shorter terms. Short-term yields occasionally rise above longer-term yields, upending the usual situation in the bond market. It’s called a yield-curve inversion. This is a strong indication investors expect economic growth to decline soon.

What stood out from the quotes by prominent business leaders cited above is the declaration by Elon Musk that “only the strong will survive” a recession. What does Musk mean by “the strong?”

It will likely be those who refuse to retreat in the face of recession and are willing to face it head-on, which is what it will take to preserve capital in the face of an economic onslaught.

Warren Buffett is famous for saying, “Be fearful when others are greedy, and greedy when others are fearful.” At the heart of this contrarian investment philosophy is the warning to attack when others retreat, which fits within the mold of the strong who survive. It will take breaking away from the herd to survive the inevitable recession, and it will take resolve to break away from the herd. Easier said than done, right?

It’s hard to break away from the herd. There’s comfort and familiarity with sticking to the herd, but unless you want to get slaughtered with the rest of the herd, you will need to find the resolve and strength to break away from the herd and do something completely different. And I’m not talking about just finding another hole to retreat to. I’m talking about doing something completely different than the rest of the investing public, who may either be staying in the market and continuing to take huge lumps or, in the alternative, sidelining their cash only to watch inflation make mincemeat of it. The third alternative is to invest in private alternatives.

Successful ultra-wealthy investors are “the strong” who have survived past recessions and hold the template for other investors to survive a downturn and prosper in it. What do they do that sets them apart from the herd (i.e., mainstream investors)?

Unlike the herd that chases the next big stock on the public markets, savvy investors gravitate towards alternative investments available only in the private markets. The herd avoids these investments because of their inherent difficulty in qualifying to invest in these private investments.

With private investments, you first must qualify to invest since they’re only available to investors meeting certain income or net-worth requirements. Private alternatives are like the best cuisine that can only be found at exclusive restaurants with long wait lists. But for those who qualify, the rewards are worth the effort.

The second challenge for any investor considering passive investments is patience – patience average investors don’t possess. Private investments are typically illiquid and have long lockup periods of typically a minimum of 5-7 years for management to realize its business plan fully and for the asset to mature to fully reward investors with cash flow and appreciation.

Smart investors gravitate towards private investments because of the opportunity to earn above-market returns at less risk – even during a downturn and even during inflationary times with assets tied to essential goods and services that thrive not only during good times but also bad.

Following the herd is easy and takes no energy. Breaking from the herd takes courage and strength. It takes courage to go where few others tried, and that is often accompanied by ridicule and scorn from friends, neighbors, and colleagues.

To survive the oncoming recession, dare to be a contrarian investor.

It will take confidence that those with the confidence to go against the grain can find contrarian investing rewarding, but it will take sticking your neck out to see if you qualify, and it will take patience.

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