How To Get Rich During Recessions
It’s easy to say that these are unprecedented times. In some ways they are, but in many ways they’re not.
A pandemic like Covid-19 feels new, but it’s not. A rapid recession feels overwhelming, but we’ve been there before.
Like all things in life, there are cycles, and the market is no different. Yes, we’re headed into a down cycle. But it’s going to be okay.
History shows us that this is a phase and a golden opportunity. While recessions are hard for many, some entrepreneurs and investors have used recessions as their launchpad to build wild wealth.
Their methods for accumulating wealth and building great businesses are no longer secret. I’ll be digging into who the winners are during recessions, and the methods you can use to walk away richer from a recession.
What is a Recession?
The term “recession” usually conjures up dark images in people’s minds. Most would rather sprint in the opposite direction than face a recession and define what it is.
Defining and understanding recessions makes them less scary. According to the National Bureau of Economic Research, a recession is defined as “a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real gross domestic product (GDP), real income, employment, industrial production, and wholesale-retail sales”. On average, modern recessions have lasted for 10 months and expansions for 57 months.
Reading the definition and seeing the average length of a recession might not inspire positive feelings, but there is a ray of hope: there have been 47 recessions in American history.
This means it’s not our first recession rodeo. We’ve experienced many recessions and have always recovered. What goes down has always come back up.
Recessions are an inescapable part of existing in a working economy. And if the natural law of recessions states that while things drop, they always rise again, it does beg the question—who will rise first?
Who Benefits From a Recession?
Certain businesses and industries thrive during a recession. Here’s who comes out a winner when everyone else is just trying to hold on.
Industries That Thrive in Recessions
Industries that are inelastic are solid winners during recessions.
No need to wipe off the dust from your old economics textbook; Investopedia defines inelastic as “an economic term referring to the static quantity of a good or service when its price changes. Inelastic means that when the price goes up, consumers’ buying habits stay about the same, and when the price goes down, consumers’ buying habits also remain unchanged.”
Inelasticity in economics is an expansive concept and is used to explain demand and describe industries. Inelastic industries offer goods and services people will always need, and therefore they remain more or less unchanged during recessions. Investopedia explains, “Healthcare, food, consumer staples, and basic transportation are examples of relatively inelastic industries that can perform well in recessions. They may also benefit from being considered essential industries during the public health emergency.”
Inelastic industries remain steadfast during recessions, but there are unique opportunities in other industries that are particular to the current recession driven by Covid-19.
It goes without saying that online shopping and remote services are booming while people remain at home. Maybe you’re kicking yourself and wishing you had bought stock in Zoom before it got big, but it doesn’t mean that all growth opportunities have vanished. The Covid-19 crisis has created unique market conditions compared to other recessions, which can lead to unique growth potential. It’s not too late to buy an online business that is taking off due to the current restrictions or to come up with a perfectly timed remote solution for people stuck indoors.
Businesses That Boom During Recessions
When the markets shift, so do people’s buying preferences. This boosts some businesses, while others struggle.
Inelasticity still holds true in a business sense. Businesses that offer healthcare services, for example, will stay the same.
But some things do change. During recessions, people cut back on non-necessities and become more self-reliant, which shows up in their spending habits. Grocery stores profit during recessions, as people tend to stay in and cook (now more than ever, grocery stores have profited from selling the essentials that people across the world need). Anything related to repairs or DIY—automotive repair and home maintenance stores—also experiences greater demand as people’s cash limitations force them to repair and maintain what they own instead of buying new items.
Though people are limited in terms of cash for big purchases, it doesn’t change their desire to shop in general. Discount retailers and businesses offering cheaper alternatives to big-ticket items win in recession environments.
It’s worth noting that if you have an established business, and it doesn’t fall into the category of a recession benefactor, it doesn’t mean you have to stay stuck. You could pivot and add cost-effective products, services, or plans to your business model to meet shifting buying habits during the recession.
Now that you have a good sense of the businesses and industries that soar during recessions and how you can tap into their potential, let’s go over which recession-proof entrepreneurs you should aim to emulate.
Entrepreneurs Who Went from Recession to Riches
Just as particular industries and businesses do well during recessions, so do smart entrepreneurs.
Historically, recessions have been the birthplace of businesses that go on to become household names.
In the worst economic crisis on record, the Great Depression, companies like Publix, Little Debbie, and Columbia Sportwear began. Ivan Light, professor of sociology at the University of California, Los Angeles, observed that recessions created what he called “survivalist entrepreneurs.” They went in a direction opposite to that of most entrepreneurs by choosing not to innovate. They built businesses in industries that people needed the most during recessions and scaled up, thanks to low startup costs and education requirements. Their lack of innovation, or meeting people where they were in hard times, allowed them to leave billion-dollar legacies.
Moral of the story: incredible companies can be born in the worst of times.
Profiting from recessions isn’t just for the history books. As recently as the 2008 recession, entrepreneurs were making strides, thanks to the economic situation. Here are some entrepreneurs who chose their own mode of innovation to make the recession work for them:
The Oracle of Ohama’s view on recessions is: “Be fearful when others are greedy. Be greedy when others are fearful.” Buffett swooped in and invested in stock worth billions of dollars in US companies who needed a lifeline during the 2008 financial crisis, including General Electric, Bank of America, Goldman Sachs, Swiss Re, and Dow Chemical. Just one of his investments in Bank of America has reaped $16 billion in profit. By taking bold investment moves when others were fearful, he helped save large companies in need of cash and created even more prolific wealth.
If you’ve seen the film or read the book, The Big Short, you’ll know Michael Burry’s name. The hedge fund manager, who saw the subprime mortgage crisis coming before 2008, bet against mortgage securities. It was a bold move and his bet made 100 million for himself and 700 million for his investors. His investing career had been built on observing fallacies in the market, betting against them when no one else would, and amassing large amounts of wealth from crashes.
Not a household name but still worthy of recognition, David Royce, the owner of Aptive Environmental, gained recognition with his environmentally conscious pest control company by investing in the success of his business. In its first year of operations in 2009, deep into the financial crisis, the company made $3 million. Royce credits that to investing in marketing, training, and recruiting. He saw that there were customers out there to be seized and plenty of great people in need of a job. He went out and hired the best and marketed his way to $23 million by the time the recession ended.
These are just a few entrepreneurs who struck big by making the right investments during recessions. There are scores of everyday people who make money during recessions by making smart investments, building their own businesses, and getting their finances in order. Next, I’ll go over what you can do to be one of those successful ones during a recession.
What You Can Do to Make Money During a Recession
Recessions hold so much potential. They’re not all doom and gloom if you take the right steps. These are the right steps to take when a recession rolls in:
Don’t Panic, Understand Cycles
Don’t panic. This is good advice for just about any situation, but it should be taken as a firm order when a recession begins to roll in.
What I mean by this is, don’t panic sell, or potentially worse, panic buy.
Relying on past data can help you keep calm and make money during a recession. Sallie Krawcheck, CEO of Ellevest, summed up why it’s important to not panic financially during hard times in this scenario:
You invested in the stock market in 1900, and you put $1,000 in. You stayed in the stock market until today, and you’ve allowed the money to compound, but there was a bunch of bad stuff that happened over that period of time. In the 120 years since 1900, there was World War I … there was the Spanish flu pandemic. There was inflation, there was stagflation, there was the war in Vietnam. There was a war in Korea. There were wars in the Middle East and in Afghanistan, and there was 9/11. There was the oil price shock, Great Depression, the Great Recession, the internet bubble. But that $1,000 would have grown to $58 million 120 years later. Despite the turmoil, staying invested would have brought big returns, even through some of the biggest economic crises in recent history.
Those who went on a selling spree in the last recession suffered. They could have held out and recovered their losses and made more money if they had held on to their investments. Everything in life is cyclical, including the economy and the markets. If you can wrap your head around the fact that highs will become lows, and you prepare for them, you’ll be ahead of most people.
Take Advantage of Low Interest Rates and Restructuring Loans
When people and businesses are in a cash crisis, opportunities to get money for cheap come to the table. Banks make money by lending money, so interest rates drop in hopes of incentivizing people to borrow.
When interest rates go down, it’s a good time to lock in a good rate on borrowed money. This also goes for loans you already have. You can restructure existing loans on your mortgage, business, and sometimes your car, for a better interest rate.
You get to take advantage of a unique window of time to secure a better interest rate, and you increase your cash flow.
Recessions are a good time to increase cash on hand. You could increase cash flow with the aforementioned dropped interest rates. You could reshift your investments to get rid of underperforming assets. You could do a giant overhaul of your finances and cut out anything extra that’s not really serving you.
There are many methods to do this; the point is to increase your cash reserves. You increase your liquidity so that you have the power to go after investment opportunities that others can’t pursue.
Most people, including many of your competitors, will be unable to act due to a lack of liquidity.
If you reallocate correctly, you can jump on businesses selling at a great price, including real estate that needs to be sold quickly by owners—the list goes on. It’s about building your war chest to make moves others can’t, and to come out stronger on the other side of a recession.
Seize Recession Investment Opportunities
With all that liquidity, it’s a fantastic time to buy.
Your chances of getting something amazing “on sale” during a recession increase, meaning you could strike a deal of a lifetime. When others need to cash out on their assets to stay afloat, you could seize the asset at a discount. This goes not just for the obvious investments, such as businesses, real estate, and stocks; bargains also trickle down to services and products you may have been eyeing.
Most everyone offering a good or service will be fighting for your business, which puts the negotiating power in your hands. Used wisely and well, negotiation could lead you to pick up a once-in-a-lifetime deal. You could also scale your bargaining power to more than one investment, making this the perfect time to build your investment portfolio. The returns you gain from your assets allow you to walk away with a profit in a downturn.
Invest in Yourself
It’s easy to get trapped in the negativity of a recession. Every day, the news comes out with some update that feels progressively worse. But there is hope. It lies within yourself.
You can invest in yourself to learn the skills needed to become invaluable at your job. You could invest in your own business and launch your entrepreneurial journey.
If you find yourself with lots of time on your hands during this recession, then it’s a great time to regroup and to think about where you can improve yourself. Those improvements could translate to a raise down the road, a higher-paying career change, or a business that transforms your life.
Unique Investment Potential in Digital Assets During a Recession
Much of the advice floating around about investing or staying afloat during the recession revolves around accepting that you won’t be making money right now. There’s too much unpredictability for hope, and the best you can do is just sit tight and pray for better times.
Letting go of things you can’t control is always good advice. And when your net worth is wrapped up in the market, letting go is probably necessary for your mental health.
But it does raise the question—why have we been told to invest our money into modes so vastly outside of our own control?
When you’re buckled into a roller coaster that is hurling you around, you may find yourself wishing you had chosen a different ride.
Online business is still subject to god-like forces, Google updates, Amazon algorithms, and commission changes. Yet, there is a way of wresting control over your digital asset that you don’t easily have in other investment modes.
If your online asset is falling in traffic or revenue, you can take matters into your own hands by looking for the root cause or jumping into conversion rate optimization (CRO).
You could change the design of your site to increase conversions and revenue. But you can’t count on taking similar shifts on a real estate property, for example. If a real estate asset begins to decrease in value and changing your property design would help raise its worth, doing so wouldn’t be cheap or easy.
While there’s not much you can do to quickly improve assets like your stock portfolio or your investment property, the earning power of a digital asset lies more within your grasp. This is a powerful lever to pull when opportunities quickly go by you.
An online business doesn’t usually stop paying you each month, which is relevant in this recession. Whereas a tenant could not pay you due to their rent being frozen as a Covid-19 financial precaution, having an online asset protects you from those risks.
Furthermore, in the current recession environment, online services and goods are lifelines to people stuck inside. So, going online with your business is timelier than ever.
No asset (or in anything in life) is risk-free. It just so happens that we are at a unique moment in time, with a silver lining for online businesses and digital assets. If you can see the potential and want to get into the online world as the demand rises, schedule a call with our team to discuss your buying criteria. If you’re realizing that now is the best time to sell, talk to us to plan your exit strategy.