The next economic collapse isn’t a question of “if,” but “when.” Smart entrepreneurs are perpetually reinforcing their war chest and reducing their exposure to any economic downturn with recession-resistant streams of income and uncorrelated investments.
Here’s how 11 members of The Oracles are hedging themselves and their families against the next downturn.
I aim to keep enough cash on-hand to make capital calls, monthly payments, and a little extra for emergencies and weddings for three years. The rest goes to entrepreneurs who I think will transform industries.
But this year, I’m putting a bunch of money into cryptocurrencies like Bitcoin, Tezos, Bancor, and Credo. Cryptocurrencies are a durable asset in tough times and a strong new asset class. They’re safer, simpler, and have less friction than fiat currencies.
My primary recession-proof income stream is multifamily, income-producing real estate investments. There are many indications that multifamily apartment investments will continue to be great. There are 75 million baby boomers headed into retirement. Many of today's apartment complexes may be converted to retirement communities in the future. Many millennials aren't buying homes. It's getting more expensive to build new apartment complexes. No matter what the economy does, everybody will always need a place to live.
I’ve always said that you can make money anywhere at any time if you just learn to sell. Sales is a recession-proof profession if you know how to sell. People buy, even in recessions, when the value exceeds price. My business is dependent upon sales, and while recessions can affect it, I make no excuses for sales dropping during a recession.
So, get yourself some multifamily real estate and learn how to sell.
One, buy long-term leased, credit tenant real estate investments such as anchor grocery shopping centers and high credit single tenants like O’Reilly Auto Parts. Think about it: in a recession, people will repair their used car rather than buy a new one. And people have to eat, so any credit grocery anchor tenants will survive.
Two, raise cash and buy collectables such as rare automobiles. These tend to fair much better during recessions. I've invested in super rare automobiles that I know will fetch a premium on the market. No one knows when a recession will hit so keeping everything in cash is not ideal because cash doesn't appreciate. I've made a significant equity appreciation in my automobile collection.
Three, refinance all of your short-term loans into longer fixed-rate loans. In recessions, lenders tighten up their lending guidelines. It's always best to refinance now and even cash out so you can to save for a rainy day—because it will rain!
In the last 115 years, there have been depressions, world wars, Black Monday, the dot-com crash, the subprime mortgage crisis, and other financial crises worldwide. When you understand how cycles work and the resilience of the global economy, hedging your bets becomes a lot more understandable. However bad the economy is, people still need food, water, and shelter. So, my family and I have invested into large swathes of agricultural land and real estate.
People who want to win in all areas of their lives work on themselves. They invest in themselves because knowledge is power and power reduces your exposure ahead of any economic downturn. I invest in myself continuously, expanding my education and knowledge base. I’ve programmed myself with an unshakable mindset that I use to decode and recode my clients’ minds and bodies. I’ve also invested, developed, and applied my own proven programs and products over the last 20 years.
Change is constant, and you have to stay ahead of it. You have to take educated and calculated risks, then employ strategies that will provide the quantum leaps you want to achieve.
There is no perfect hedge against economic collapse, and no industry is immune to possible economic volatility. A basket of cash-positive positions is the best way to survive economic meltdown. I would start with a strong position in gold and silver.
Secondly, I would place cash in treasury notes and safe bonds like utilities. For the remainder of my portfolio, I would keep cash in euros, Swiss francs, and dollars. Nothing is perfect, but a balanced portfolio in safe haven allocations will help ride out the economic storm and keep your family warm and dry during the deluge yet to come.
Businesses don’t go bankrupt because they aren’t profitable; they go bankrupt when they run out of cash. I set aside cash for our company to help prepare for unforeseen circumstances. In personal finance, most financial advisors will recommend having at least three months of emergency funds. But many small businesses that I’ve worked with don’t have the systematic discipline to set aside three months of operating expenses in cash. At our company, we have three separate savings accounts that I set aside a portion of money to go into every week automatically.
After a certain amount of profits are made in our company, I diversify it with real estate. However, not all real estate deals are created equal. You must be able to carefully discern whether your real estate property is a liability or an asset. I’m interested in diversifying business profits into assets. For example, our company is finalizing the purchase of a commercial building. The building is twice the amount of space we currently occupy. At the end of the year, with this purchase, I’ll end up paying about the same monthly amount toward owning an asset, as opposed to just paying rent. Furthermore, we’ll have additional space to potentially rent out to increase cash flow if we decide to.
I always encourage entrepreneurs to build a black swan fund. If there was a sudden market pullback, wouldn’t it be amazing if you had allocated cash sitting ready to buy assets at fire-sale prices?
I even go as granular as writing my fire-sale wish list. For example: “If Apple ever drops below $25 a share again, I’m going to buy and hold,” or, “If that Jackson Hole ranch I’ve always wanted drops to $2.5 million, I am going to buy it.” This gives me the market courage based on strategic decisions that I’ve already made, instead of being driven by fear or greed of the current market cycle.
If you're an entrepreneur in the real estate game, you better think long and hard about which segment of real estate you want to own. What will easily survive the next downturn or rate hike? We are currently trimming our portfolio of everything except one-off residential properties such as single-family homes, townhouses, condos, or two flats. Anything else can put you out of business.
Community shopping centers with salons, dentists, or ground lease restaurants will survive. Otherwise, everything is being delivered to your doorstep. Industrial, office, big box retail, and even multifamily are risky investments at this stage in the cycle. They are purely rate- and yield-driven. Rarely is there much intrinsic value in these asset classes.
Buy a house, condo, or townhouse and rent it out. Everyone always needs somewhere to live.
When times get tough, look closer at your existing business for additional ways to make money from what you’ve built. Too many entrepreneurs leave millions on the table by not thinking about what else they can offer.
A few years ago, when revenue was dipping, a mentor asked me what I was doing to maximize it. I was only focused on our front-end sales but realized we could create an outbound department to reach people who didn’t buy and to reach existing customers who hadn’t purchased in a while. We created a monthly newsletter with great information about health and wellness. We started "The Alden Report" podcast. We offered services to marketers. All the foundations were there; I just wasn’t looking hard enough.
Also offer products and services that complement your primary offering. We spoke with our customers and realized that some of our other products complemented our primary one.
Investing can be broken down into two general categories: luxuries and necessities. During difficult economic times, consumers are forced to give up their luxuries to cover their necessities. For instance, humans will always need to take their medications to sustain self-preservation. Investing in essential products yields positive results, even during harsh economic times.
Investing in your customers is another fantastic way to overcome an economic decline. My mentality is when my customers succeed, I succeed.
Invest internationally to diversify your portfolio. It promotes stability and reduces overall loss. Despite the global economy being interconnected, every economy is unique and relatively independent. A poor-performing sector of the U.S. economy doesn’t necessarily carry over into Europe. Having an international portfolio within a specific industry will likely keep you afloat if one country’s market takes a dip.
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