“Pain is important: how we evade it, how we succumb to it, how we deal with it, how we transcend it.” – Audrey Lord

What I’m Telling My Business Partners 

Sitting on the front porch, looking at the many people walking on the beach, it’s hard to imagine that we are on the edge of what could become the greatest economic disaster since the Great Depression.

It doesn’t feel that way when I get in the office. I’m spending half of my day on the phone and emailing colleagues, trying to narrow down plans of action to deal with expected production and delivery bottlenecks and a possible collapse in sales.

I’m not terribly worried about my investments. (I wrote about that on Wednesday.) But I am worried about the dozen businesses I own and/or consult with. And their thousands of employees.

The enormity of the crisis most businesses are facing right now cannot be underestimated. This supply-chain problem the media is talking about is real. Most of my businesses are dependent on internet services, telecommunication services, delivery services, etc. And some are dependent on manufacturers all over the world, including China.

All have either sent their employees home or have given them the choice to work from home. All of the CEOs are drawing up contingency plans for three-, six-, and one-year scenarios. All of them are asking their CFOs for suggestions for cutting costs dramatically. All of them are worried about the unhappy possibility of large-scale layoffs.

Most of these companies are high-margin enterprises, with net revenues of more than 40% and net incomes of 15% to 25%. So you’d think that they wouldn’t be concerned about cash flow. But the nature of good businesses is to reinvest profits in growth. That may not be the best strategy for 2020.

So what does that mean for you and your business? The business you own, supply, consult for, or work at?

It means you must be making plans right now for the obvious contingencies. As a leader, you must demonstrate confidence and calm. But you don’t want to do that by ignoring the elephant. You have to keep the captains and their troops alert but not panicked. And you must ask them to work harder now than ever.

This is not a time for enjoying a quarantined vacation. If you’ve been accustomed to working 50 hours a week, you should plan on working 60 or 70. And you should expect your best people to do the same. If they aren’t willing – no, eager – to do that, you should reconsider whether they are, indeed, your best people.

And although you should plan on a significant drop in sales, you should not relax your expectations of what your sales and marketing teams can do. In crisis, good people become stronger and more creative. Encourage them to find ways to encourage your customers to stick with you as the economy declines.

I had a conversation with Number Two Son tonight about our rental real estate properties. We anticipate that some of our tenants will have trouble keeping up with the rent. We agreed that we should not forgive monthly rental obligations, because doing so could send the wrong message. What we will do is accept percentage payments on an as-needed basis, with the understanding  that what is not paid is not forgiven. Renters will sign contracts to that effect. What I’ve learned from living through a half-dozen stock market crashes and recessions is this: Free rent, even on a temporary basis, is like free anything in life. It’s a feel-good, bad-outcome bargain. We will be flexible, but we will not be foolish.

I am very much in favor of not being greedy in business. And that applies as much in bad times as in good. Where my businesses have accumulated profits, I have been arguing that we should prioritize needs. The first priority is not short-changing our customers.  We can ask for their patience in certain areas. But we cannot ask them to expect inferior products or services from us just because times are tough.

Next on the priority list are our employees – especially the hardworking and loyal employees that have for so long helped our businesses grow. We should try our best to keep all of them fully employed, and use our spare cash flow to do that. And if we have to make cuts, we should do it as generously and humanely as possible. Of the three actors in business – shareholders, employees, and customers – it is the shareholders that should take the brunt of the hit. Not the customers. Not the employees.

That said, we don’t want to deplete the treasury to the point where these businesses could fail. A bankrupt business, however kindly it has acted towards its customers and employees during a crisis, will do no one any good if it goes belly up.

I’m sure I’ve said nothing here that you haven’t thought of yourself for your business. Smart people faced with the same problems usually arrive at the same solutions. But thinking about solutions and executing them are two different things. If you haven’t acted on any of these obvious but important strategies, waste no time. Time is running short.

There is one more thing I can say that you may not have thought of, especially if you are new to business downturns: Don’t allow yourself to believe that what has worked in the past to build your business isn’t going to work any longer. Changes will be necessary, but the fundamentals of business do not change in a crisis. On the contrary, they become more important than ever.

And one of those fundamentals is the trust that your customers have in you and the products and services you provide them. This is, along with cash, the most important financial resource you have. Don’t make the mistake of going quiet with your customers and hoping to ride out the storm. And don’t market as if things are normal or will be normal soon. They won’t buy it. If you don’t stay honest and in constant contact with them, that trust will be degraded. Now is the time to up your game. Now is the time to show your customers that they have, in you, a trustworthy fellow traveler that is eager to make their problems and worries less severe.

“I have learned over the years that when one’s mind is made up, this diminishes fear; knowing what must be done does away with fear.” – Rosa Parks

What I’m Doing (and Not Doing) to Safeguard My Wealth

It’s a scary time. The coronavirus is scary. Being in the stock market is, too.

Before I tell you what I’m going to do about my stock portfolio, let’s take a quick look at the biggest crashes in the last 100 years. I think it’s important to remember that we’ve experienced financial hardships in the market, and we’ve been able to rebound from them.

The Crash of 1929

By almost every measure, the stock market crash of 1929 was the biggest and most devastating crash in world history.

It occurred after nearly 10 years of economic expansion from 1919-1929 (the Roaring Twenties). This was a decade of steady, dramatic growth that created a sense of irrational exuberance among investors who were happy to pay high prices for stocks and also leverage those investments by borrowing money to do it.

By August of 1929, word was getting out that times were changing. Unemployment was rising. Economic growth was slowing. Stocks were overpriced, and Wall Street was hugely overleveraged.

On October 24, the market dropped. It dropped again on the 28th. And by the 29th (Black Tuesday), the Dow had dropped 24.8%. On Black Tuesday, a record 16 million shares were traded on the New York Stock Exchange in one day. Investors collectively lost billions of dollars.

Financial giants such as William C. Durant and members of the Rockefeller family attempted to stabilize the situation by buying large quantities of stocks to demonstrate their confidence in the market. But this didn’t stop the rapid decrease in prices.

Twelve years of worldwide depression followed, and the U.S. economy didn’t recover until after World War II.

The Crash of 1987

Like the crash of 1929, the crash of 1987 occurred after a long-running bull market.

On October 19 (Black Monday), the Dow dropped 22.6% – the biggest one-day drop, in percentage terms, ever.

Theories behind the reasons for the crash included a slowdown in the US economy, a drop in oil prices, and escalating tensions between the US and Iran. But the financial reasons were similar to those for the crash of 1929: speculators paying crazy prices for overpriced stocks and purchasing junk bonds leveraged mostly through margin accounts.

On top of that, something new was happening: computerized trading. It made selling easier and faster and, thus, accelerated the sell-off.

When the dust settled, the market was down 23%. But unlike the crash of 1929, Black Monday didn’t result in an economic recession. In fact, it began strengthening almost immediately and led to a 12-year bull run.

The Dot-com Bust of 1999-2000

In the 1990s, access to the internet started to shape people’s lives. Easy access to online retailers, such as AOL, Pets.com, Webvan.com, Geocities, and Globe.com, helped drive online growth. It also gave investors a huge opportunity to make money.

Shares of these companies rose dramatically – in most cases, far beyond intrinsic values.

In March 2000, some of them started folding, and investors were shedding tech stocks at a rapid pace. The tech-focused Nasdaq fell from 5000 in early 2001 to just 1000 by 2002.

The “Great Recession” Stock Market Crash of 2008/2009

Besides the crash of 1929, the crash of 2008 was in many respects the most serious financial collapse of the last 100 years. Many investors don’t realize how close the US financial sector came to collapsing.

Like every crash I’ve mentioned, this one followed a long-term bull market (from 2002 to 2007). Also like the others, it was instigated by speculation. Not so much by speculation in conventional stocks, but by the widespread use of mortgage-backed securities in the housing sector.

These products – which were sold by financial institutions to investors, pension funds, and banks – declined in value as housing prices receded. (A scenario that started in 2006.) With fewer American homeowners able to meet their mortgage loan obligations, mortgage-backed security values plummeted, sending financial institutions into bankruptcy.

With investment risk in the stratosphere, investors were unwilling to provide much-needed liquidity in the nation’s financial markets.

And we all remember what followed. The bursting of the US housing bubble and Lehman Brothers’ collapse nearly crushed the world’s financial system and resulted in a damaged housing market, business failures, and a wounded global economy.

A Few Facts That Might Make You Feel Better

None of the four major stock market crashes permanently damaged the US economy. In every case, the markets climbed back up and then went on to new highs. But the duration of the downturns varied.

The 1929 crash was the slowest to recover at 10 to 12 years. (Depending on how it is measured.) It took seven years for the market to fully recover from the crash of 2008. And the crash of 1987 began recovering after a few months.

Even where full recovery took years, the upward trend began in months or just a few years.

Those crashes happened because of a combination of economic imbalances, flaws in the banking and financial sectors, a period of manic investing that brought market values to unrealistic heights, and panic.

In other words, they were caused by economic and financial crises.

The current crash was precipitated by a health crisis. In stock market language, that’s considered an event-based crash.

Past health scares have shocked the market, too. In 2013, for example, the MERS outbreak caused the market to drop by 6%. And in 2003, the SARS outbreak caused a worldwide panic, taking the market down by 14%. But both of these event-driven crashes were followed quickly by a surge back to past highs and then beyond.

On the Worrisome Side

Is what we are experiencing today just another event-driven crash?

I don’t think so. There’s no doubt that fear is the force behind this fall. But the fear we have today is much greater than any in my lifetime. And it is already negatively affecting businesses, banks, and other financial institutions worldwide.

And that’s not to mention the fundamental factors of a history of high debt (both government and consumer), years of increasingly expensive stocks, and lots of speculation.

 As I pointed out in my February 17 blog,

* Half of all investment-grade debt is teetering on the edge of becoming junk. And more of these risky loans are being owned by mutual funds than ever before.

* The national debt continues to grow. It was $5.6 trillion in 2000. Today, it’s estimated to be more than $23.3 trillion.

* As a percentage of the country’s gross domestic product, the debt looks even worse. In 2000, that $5.6 trillion in debt represented 55% of our GDP. Today’s +/-$24 trillion represents nearly 110% of our GDP.

It’s certainly possible that the Corona Crash could be the beginning of an economic downturn as big as or bigger than any the US economy has ever had. The collapse of the stock market is already greater than any crash before.

I’ve written about the stock market at least a dozen times over the past 10 years. And in each of those essays I’ve reminded readers that I don’t have a crystal ball and that my guess about the market’s future is as valid as your next Uber driver’s.

In my lifetime as an investor, I’ve seen several serious bear markets. Had I been able to predict their tops and bottoms, I would have cashed out my stocks early, moved into cash and gold during the descent, and put back that and some more at the bottom.

But since I’ve never had a crystal ball, I’ve never tried to time the market. I’ve always taken the view that, while I can’t know how steeply the market may drop or how long the recession might last, sooner or later prices will return to their pre-crash peaks and then continue to move up from there.

I should say, though, that this strategy makes sense only when the stocks you own are in large, profitable businesses that are “antifragile,” that have the resources a business needs to survive a crash and even an extended recession.

As long-time readers know, my Legacy Portfolio is populated exclusively with companies like that.

 What About Buying Gold?

I bought a fair amount of gold back in 2004, when it was selling for $400 an ounce.

I didn’t buy it as a hedge against the dollar or the stock market. I bought bullion coins (mostly) as a “chaos” hedge. A stockpile of tradable hard assets that might come in handy if the world economy moved into another depression like we had in the 1930s.

If we do see that economic era repeated, the value of my gold will almost surely continue to increase. But I’m not counting on that. Its purpose isn’t to compensate for the paper wealth I’d lose in stocks but to be a form of insurance – “just in case” currency that I could use to buy necessities for family and friends.

Which raises the question: When and how do you buy gold? And the answer is, you buy it just like you buy any sort of insurance. Figure out the likelihood of the risk. Determine how much coverage you would need. Then decide if the premium you have to pay is worth it.

When I decided to buy gold coins, I bought enough of them (at an average price of $450) to sustain my family and my core business for a good length of time. I didn’t buy enough to cover historical expenses for many years. I bought enough to pay for the basics. And that helped me feel more secure.

But that was hardly all that I did to protect my family’s wealth against a stock market crash and a recession. It was just one piece of a financial structure that I began setting up 40 years ago and began writing about in Early to Rise nearly 30 years ago.

What About Stockpiling Cash?

I like having a portion of my net investible assets in cash for all the obvious reasons – doing my own banking, using it for fast moving investment opportunities, and as part of my insurance program against crises like this one.

But that feeling is counterbalanced by the recognition that cash is generally a low- or no-return asset class. Therefore, having a lot of it means that I won’t be taking advantage of the historically high returns of the stock market, the real estate market, private equity, and private lending.

I don’t have a fixed number in my head for how much cash I should have at any one time. I let the markets make those decisions for me.

I don’t, for example, invest in rental real estate properties when I can’t find properties I can buy for less than eight times gross rent. Likewise, I don’t buy additional shares of Legacy stocks when their P/E ratios are expensive by historical standards.

By adhering strictly to these sorts of value-based investing strategies, I am effectively prevented from putting my new earnings into any one of them. And that means I end up accumulating lots of cash while these markets are expensive.

In the past half-dozen years, most stocks – including most of my Legacy stocks – have been so expensive (relative to earnings) that I have not allowed myself to buy them. This means that the dividends I’ve been receiving for the stocks in my Legacy Portfolio have been going into my cash account. And that is okay with me.

I normally put a good chunk of my earnings every year into real estate. About 10 years ago, I began selling off my individual units and buying apartments, where I could get better yields with less hassle. But the number of such deals that I could find diminished to a trickle in the last three or four years. So, again, by sticking to my valuation standards, I’ve been effectively locked out of these markets, too.

I have put some money into private debt and private equity. But only when I knew the borrowers and the businesses very well and felt sure my lending was secure.

 In past essays on the stock market, I’ve said that – to make my wealth as antifragile as possible – I did my projections based on a stock market crash of 50%. When I picked that number nearly 15 years ago, it seemed like quite a long shot. Today, it doesn’t feel so crazy.

My Version of Antifragility

 As I’ve indicated, my core investment philosophy mimics Nassim Taleb’s concept of antifragility.

In his bestselling book Antifragile, Taleb defined antifragility as the ability to not only survive but also benefit from random events, errors, and volatility.

My version of that is very simple:

* I invest primarily for income, not for growth. That means rental real estate, bonds, private debt, income-producing equity, and dividend-yielding stocks. Depending on the economy, not less than 80% and sometimes as much as 90% of my net investible wealth is in income-producing assets.

* I invest in what is proven today, not what might happen tomorrow. Investing in income-producing assets means investing in current facts, not future possibilities. This is, admittedly, a conservative approach to wealth building. I am willing to give up the potential for cashing in big on the upside for a smaller but virtually guaranteed return.

* I don’t gamble. I am as tempted to invest in attractive speculations as the next person. But I’ve learned from experience that is a bad idea. My historical ROI for the speculation I’ve done is nearly perfect. I’ve lost almost all my money every single time. I will occasionally invest in a friend’s business. But when I do that, I consider it a gift. I expect no return and usually get no return. So I limit those “investments” to how much I’m willing to lose.

* I pay attention to value. I invest exclusively in income-producing assets, but that doesn’t mean I don’t pay attention to how much they are worth. As I said above, I invest in stocks when they are well-priced relative to their P/E ratios (among other metrics). I invest in real estate when I can buy properties that are inexpensive relative to their rental income. I buy debt when I can get a yield that is at least better than inflation. Etc.

* I hope for the best but plan for the worst. In terms of antifragility, nothing is more important than planning for the worst. Planning for the worst in good times allows you to survive and even thrive during the bad times. My worst-case planning began by imagining almost everything going wrong at one time. The market collapses. The economy moves into a deep recession. My businesses fail. The whole nine yards.

When you think that way, you have no choice but to include all the fundamental asset-protection strategies in your financial planning, as well as a few more. Most notably, diversification and position sizing.

I won’t waste our time talking about the importance of diversifying financial assets. I don’t look at it as a theory. I see it as a fact. To achieve maximum antifragility, dividing your financial assets into different classes is rule number one.

But in my humble opinion, position sizing (limiting how much money you put into any particular investment) is almost as important. When your investible net worth is relatively small, you might have to limit individual investments to 10% of your portfolio. The goal, as you acquire wealth, is to reduce that percentage as you go along. These days, I rarely put more than 1% of my net investible wealth in any investment.

So What Am I Doing?

Here’s a look at my portfolio:

Stocks: I came into the stock investing game late. And cautiously. When I set up the Legacy Portfolio about 14 years ago, I invested what was at that time 10% of my net investible wealth in those stocks. Thanks to the bull market that followed, my stock account doubled and stood, at the beginning of the Corona Crisis, at about 20% of the portfolio. That’s a good deal. But it’s still only 20%. So when the market is down 30%, like it is as I write this, that means my net investible wealth is down by 6%. If the market continues to fall to 50% – my worst-case scenario –I’ll be down 10% overall. Not good, but not bad either.

My strategy for stocks is to hold on and wait for the market to recover. It might happen in six months (unlikely). It might happen in a year (possible). Or it might happen in 10 years (safe bet). I’m hoping the return will be sooner rather than later – but I’ve planned for later, so I’m not going to fret about it.

Debt: About 10% of my net investible worth is in debt instruments. My debt portfolio is diversified among bonds and private lending. Because of the private debt, I’m getting decent returns – from 4% to 12% on most of my deals. For a while, I’ve not been able to buy good debt at good prices. But that may change. If so, that’s where some of the cash will go.

Ongoing Enterprises: About 20% of my net investible wealth is invested in about a half-dozen private companies, ranging form $10 million to $1 billion. This is where I get the lion’s share of my current income. I’m very concerned that this income may slow or dry up completely in the next year. If it does, I will have to turn to other income sources. Meantime, I’m working hard to keep those businesses afloat.

Real Estate: About 40% of my net investible wealth is invested in real estate, and 80% of that is in income-producing properties in various locations. If all of these properties were leveraged, I’d be worried. But my debt on them is less than 5%. I may see diminished income. But in the worst-case scenario, it will be a 25% drop, which would still be acceptable.

Hard Assets and Cash: About 5% of my net investible wealth is in hard assets like bullion coins, rare coins, and investment-grade art. These are last-refuge resources. For the time being, I have not thought of tapping into them. That could change.

Cash: As I explained above, my cash position has grown in the past several years because my preferred income-producing assets have gotten pricey. I’m expecting that some time before this crisis is over, cash will be king again. I’m waiting for that.

Basically, I’m doing just about nothing right now. I am actively working to protect my businesses, but I’m not selling stocks. I’m not selling real estate. I’m not selling my businesses. I’m not even selling my debt.

We are going to get poorer. That’s for sure. But – for the moment – I don’t feel that I need to make any changes. The way I diversified my assets 20 years ago seems to giving me the protection I had hoped it would today.

But What About You?

If you have been reading my writing these past 20 years and even loosely following my investing strategy, you should be in more or less the same position I am in. If you feel good about that, as I do, you will probably want to do exactly what I’m doing: mostly nothing.

But if you aren’t diversified and have the lion’s share of your money in cryptos or growth stocks – well then, you are going to have to listen to the advice of the people that persuaded you to put so much of your money in those deals.

And while you are doing that, don’t despair. Double down on your day job. Things will (eventually) get better – and when they do, you’ll invest smarter.