A smart friend presented at the Urban Land Institute (ULI) national gathering in January. He noted that we never know in advance what causes the next recession. He mentioned that if the Chinese virus were especially contagious, it could reach the US and cause recession.
Another friend called me in early February. He pondered the news and talked to some bio-tech friends about the possibility of a pandemic. Based on their feedback, he did some more research. He decided the virus could cause a recession in the US and Europe but could do more severe damage to Asia, Africa, and the Middle East.
Getting economic predictions right is hard. Many experts get it wrong. Remember the Great Recession? Fed Chair Ben Bernanke was an expert on the Great Depression, but he didn’t see the recession coming. Neither did most other experts.
Predicting something others don’t see is impressive. Give both my friends credit. They both consumed a wide range of news. They knew enough about statistics and risk to foresee potential problems. But my second friend went a step or two further.
He told me he had sold his stocks and was going to firesale several pieces of income property to obtain cash in two weeks. He explained that if his hunch was wrong his investment’s value might shrink 10%. Alternately if the virus shattered values and upset the economy, then he would have the cash to buy at steep discounts. He pondered what industries and activities would be most severely damaged. He shorted cruise lines. When the market dropped, he suddenly had many buying opportunities.
I hope you’re that smart and/or lucky in the future. My second friend estimated what it would cost him if he were wrong. Then he acted. He sold all his stocks and several investment properties. He didn’t sell all of everything.
The point of this post is not that couple of my friends are smarter than me. We should all have friends smarter than we are. The truth is that being right and famous didn’t boost my first buddy’s wealth. The second fellow was a month later with the right theory. The second friend did the hard work of thinking and the brave work of acting.
Being smart or wise doesn’t automatically make you wealthy. An intelligent assessment of the risks and potential rewards moves you further along. Annie Duke, the author of Thinking in Bets, explains understanding the odds enables you to know when to hold them and when to fold them.
Even that is no guarantee. Sometimes you know the odds are with you and yet you still lose. Luck and other factors beyond your control can affect the outcome. Writer, bon vivant, and horse player Damon Runyon put it more colorfully.
“The race is not always to the swift, nor victory to the strong, but that’s the way you bet.”
Behavioral economists say most people decline even bets. Generally, we want twice as much potential reward as potential loss. In other words, people are risk adverse. We hate losing one dollar so much that we won’t bet unless there is an equal chance of winning two.
We recognize more uncertainty now than we understood in February. Maybe now people need a 3 to 1 or maybe even a 4 to 1 ratio to act.
My day job involves talking with millionaires. 80% of the millionaires that I’ve talked with in the last six weeks are not acting. They’re not confident about their ability to make a good decision. Most of them became millionaires by taking prudent risks that scared others away. Now, they’ve accumulated wealth and don’t want to lose it. They’re risk averse.
In kayaking there is a word for not acting- drifting. Drifting means you end up where the current takes you. Whether you notice or not we’re affected by motions, trends, waves. On land you can sit still and not move. In life and in a kayak, if you’re not taking action, then other forces are moving you. You’re drifting.
Perhaps you perceive the risks as too great to venture anything. Fine. Perhaps you think things will get worse. If so, maybe you should sell. Perhaps you expect things will get much better. That conclusion implies you should buy.
About once a decade there’s a dramatic economic shift. Recessions are usually when the bigger shifts come. We didn’t volunteer for this recession, but now is an opportunity for unusually superior returns. Want to investigate them? How will you respond? Can you choose a better strategy than drifting?
Terry Moore, CCIM, is the author of Building Legacy Wealth: How to Build Wealth and Live a Life Worth Imitating. Read his “Welcome to My Blog.”