Recession is here. Don’t let FUD make you do things you’ll regret.
Successfully navigating a recession requires separating positive actionable data from fearmongering drama geared towards getting you to act in someone else’s interest.
We suffer from two things:
Short-term memories (of the latest bull market)
Being drawn to fear and drama (fight or flight instincts)
We forget that the world is cyclical.
Learning the ropes by investing in semiconductors, as I did, is like Survivor for the Stock Market. A factory is built in 18 months, then new supply spews out of this factory, guaranteeing an oversupply situation. And management teams all invest and build at the same time. They all see the same data and act like a herd, investing when supply is tight.
Like Tarzan swinging through trees, we swung into a semiconductor downturn at LEAST once every 2 years.
It was an emotional rollercoaster.
Management teams would be raising estimates to the moon, forecasting the brightest futures, while they flew around on private jets. Slowly, then all of a sudden, supply caught up with demand.
I’d get a call from a CFO in the middle of the night, in tears, sobbing that there were no more orders.
Others held it together more professionally.
The Japanese executives were particularly stoic. In one cycle, Taiwan manufacturers were determined to crush the Japanese by outbuilding them. The pricing of their products started to plummet. The Japanese remained calm.
Pricing then went below their cash cost. They were PAYING to make products for customers.
September1996, as we entered the depths of a semiconductor downcycle, we visited NEC, a large Japanese conglomerate. The head of their semiconductor division tried to remain calm. The only signal that he was dying inside was his hand trembling as he puffed on his cigarette and whispered “We…are…fine” between desperate inhales.
Like Semiconductor downcycles, recessions aren’t fun, but they aren’t unique. They contain more pain and often more opportunities than boom times. An opportunity to buy an asset on sale. An opportunity to change jobs or careers. And many challenges too.
Recessions are part of the ebb and flow of life.
Google says we are focused on recession
Search for “Recession” is up 400% in the last year
“Layoffs” saw a 200% increase in searches
Searches for “Market Loss” is up 300%, but trending down again
Yet, we are eternally optimistic
“Stock Market Rally” is up 600% - investors want to know when to buy in
“NASDAQ” searches are up 450% - investors know tech will lead the way out
“Federal Reserve” is up 250% - investors are hoping the fed will slow or pivot their rate raises
These searches show our fear and optimism are both alive:
Are we headed up soon, or will this take longer?
When is the right time to buy?
What should I DO?
How can you figure out what to do without being manipulated?
Marketers’ biggest challenge is to get people to ACT.
Fear is a great motivator.
While we may be optimistic, those wanting your attention focus on the negative to get you to do what they want.
There are real risks (housing market, layoffs, stock market) in a recession, there are also opportunities that aren’t talked about as much (but they are searched for).
The term recession is getting over-used because fear is a great tool to get people to act.
What should you do?
Back to my rapid-fire recession “experience” in the volatile semiconductor cycles. There we had a “recession” in our sector every 2 years. Here’s how it went, and what we can learn.
How it went in semis:
There are no more cycles, we will be at this high level from here on out
We are seeing incredibly strong orders, so strong that we will add capacity
Yes, everyone is adding capacity at once, but demand will soak it up
Ooops, capacity came on all of a sudden, and some demand was faked (double orders)
Customers are using supplies they already ordered, so we have zero orders
We are pausing all our orders and stopping building any factories
TIME PASSES
We are starting to see an improvement in orders for maintenance items, just a blip
New technology is being built with our chips, so demand is increasing
There are no more cycles, we are at a new all-time high level and will stay here
Every. Single. Downturn.
Other investors and financial experts said growth in semis was over. This was the end.
Why?
Fear motivates. Fear gets more clicks. People are drawn to drama.
And yet, every time, we rebounded to higher highs!
What we can learn
Nothing can go up in a straight line forever. The math doesn’t work.
Ebbs and flows are natural.
Recessions expose the Ponzis and frauds, and let us clean house.
Layoffs suck but are an opportunity to explore different directions and careers
Budgets get tighter but are a chance to simplify and question what you really enjoy
The definition of a recession is 2 quarters of negative growth, then a rebound
Recessions are about taking care in the downturn and preparing for the upturn
Don’t get stuck in worry. Don’t get frozen, unable to act, living like a depression-era baby unable to invest in your future.
Find your balance to ride the wave from contraction to expansion.
Create financial safety with cash, tighter budgets, and extra work.
And create your financial opportunity by being ready to expand:
Start researching the stocks you might want to own, and at what price
Pay attention to new industries that are emerging
Remind yourself to use first principles, analytical, and independent thinking.
Watch for what has fallen out of favor the most (careers or assets) as many of those will have the biggest rebounds. Case in point? Intel vs AMD…
How to buy in a downturn
In the brutal 1996 semiconductor downturn, Samsung was “shipping dollars with DRAMs.”They were literally paying more to build chips than they were charging for the chips. Financial statements were bleeding.
During that bleak time, one investor said to me:
“I would never own Intel with a 10 foot pole, even if you paid me.”
My lesson - no more sellers, time to buy Intel.
The correct lesson?
Buy AMD as it’s almost bankrupt so if people hate Intel, then they hate AMD even more and it’s a better bet.
Results?
Intel up 3X out of that downturn
AMD up 30X out of that same downturn
In the heat of the moment, it’s never that simple. AMD really was on the brink of bankruptcy. Intel looked like the safer bet. All companies were bleeding money.
Don’t forget when they throw out everything in the depths of the downturn, to look around and add a few long shots to your portfolio.
Stay safe, keep learning and don’t let fear mongers drive your behavior!