Cash In On The Economy’s Problems

by Joseph · 4 comments

in Investing

The most unintelligent thing that you can do with your money during an economic downturn like the one that we’ve been facing is to cash out, stand back and wait until the smoke clears.  It seems like an obvious thing to do to so many people.  But by doing so you are not only taking away from current earnings (by investing when the market is down) but you are taking away future earnings as well.

To learn more about investing and how to cash in on economic problems we might benefit by taking lessons from the world of business and the Oracle of Omaha.

A Smart Company Uses A Recession To Their Advantage

What do you expect a company to do during a recession?  Take your favorite clothing manufacturer (or any other business, i.e. video game company, restaurant, etc.) for example.  Over the past six months have they spent less or more money?  Do you notice them advertising more or less?  You may not know if they’re spending more or less, but you probably have a good idea on if they have been advertising more or less.  If they have been advertising less you would probably assume that it is because they are trying to cut costs during this downturn.  After all they’re probably selling less and marketing seems like the most obvious thing to cut first, right?

Wrong.

A smart company uses a recession to their advantage.  They should never cut back on advertising.  They might actually consider increasing their marketing budget.  They should be more picky on the quality of their marketing, but if they want to be more successful they need to maintain – or increase – their current level of marketing.

Think about it this way.  Let’s say that you and I own a company.  We sell trinkets to consumers.  We’ve been affected by the slow economy, just like everyone else.  We have maintained a steady budget in the marketing department over the past four years.  However we are competing against another trinket company who has been able to capture a larger market share than we have.  Cash is slowing down and we are considering cutting our marketing costs, just like our competitor has done.  Do we do it?  Absolutely not.  Our competitor has decreased their level of permeation among the public.  They’ve cut the number of advertisements in half!  We should take advantage of this and put our name out there even more than before.  By doing this we will ensure that the majority of the trinket sales are coming to us and even more we are ensuring that once the recession ends and people begin again to buy trinkets on a much more regular basis they will be looking to us to purchase them.  They know our name.  We kept it out there.

Our company not only succeeded, in the short term, by continuing its “investment” in advertising, but it also managed to ensure even greater long term success.

A Smart Investor (Likewise) Uses A Recession To Their Advantage

Just as a company should be smart about investing (through the mediums of marketing and advertising) in order to place themselves in a better position for the future, so should an individual investor be smart about investing (through the mediums of stock & bond exchanges).  No one has ever been better at investing than the Oracle of Omaha, and likewise no one has ever said it better…

Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it. -  Warren Buffett

Bear with me on my analogy.  Just as a company uses market fluctuations to their advantage, so should the average person.  Why let a little bit of uncertainty get in your way?  Sure you might not know who is going to be President of the U.S. next year.  That decision alone may have an impact on the stock markets.  But are you investing in the stock markets, or are you investing in a business?  Warren Buffett prefers to invest in business, and frankly he’s the rich one.  Surely we could learn a little from him?  As he said you should “profit from folly.”

We have seen some severe market fluctuations over the past year.  This is scary and will always be scary.  It’s best to hold tight and hang in there.  Just because we’re facing a recession does not mean that you should stop investing, or worse pull out of your investments.  Do as Warren Buffett does.  Even in the midst of a recession he has been continuously investing.  Why should you do any different?

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{ 1 comment… read it below or add one }

Eden September 6, 2008 at 2:26 pm

Very true! I never understood why people want to sell out of their investments when the market goes down. Well, I do understand why (fear), but it just makes no sense.

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