9 ms·

How to survive and thrive in a down market

88 points by allenleein 8y ago

montenegrohugo 8y ago
I've been hearing about an incoming correction since 2013. As always, no one has any clue when it is coming and the age old tenet holds true: Time in the market beats timing the market.
- paidleaf 8y ago
  > I've been hearing about an incoming correction since 2013 We've have 2 corrections the past 5 years. We even had one in the beginning of this year. https://www.investopedia.com/terms/c/correction.asp https://www.investopedia.com/terms/c/correction.asp What you may be referring to is a recession, which is different from a correction.
moltar 8y ago
tl;dr have money ready
- skate22 8y ago
  1.5 years+ of money
gatsby 8y ago
Investors frequently say things like this: “Am I at, or can I get to, profitability on the money I have?...(If so) Go raise “opportunistic money” from your existing investors at a good or great price.” If you’re profitable and believe that your customers will continue investing in you, you should think long and hard about raising more capital as “the answer.” Raising more capital is sometimes the answer, and it’s an investor’s job to convince you that raising capital is always the answer.
- VBprogrammer 8y ago
  That statement made me feel uncomfortable. Isn't it exactly this type of attitude that creates financial bubbles in the first place? Without a plan, or even a good reason, for that money how does it contribute to making your business more profitable or resilient to the vagaries of your market? In the short term it'll keep you afloat but that isn't going to be a big consolation when the money does run out. Stock piling cash in exchange for huge amounts of equity seems totally irresponsible.
  - weavie 8y ago
    > Bottom line: In almost all of the cases above, my advice is to build a war chest of capital so that you can deploy it in the down market. What I think he is saying is that in a downturn things can get tough if you don't have enough cash to get through it, and it will be harder to raise more money if you need it. But, in a down turn everything also gets a lot cheaper so if you do have the cash then then you can really capitalize on this and emerge from it as the leader in your sector.
    - VBprogrammer 8y ago
      Yeah, I can definitely see the argument for having a war chest. Building it by exchanging a chunk of your equity for it in the hope that on the other side of the storm (what is that old fable about economists correctly predicting 11 of the last 7 down turns?) you can make that back and then some feels a little too much of a gamble. You'd have to be incredibly lucky to get the timing right. Building a war chest by maximising profitability and minimising costs I could definitely understand. Perhaps I just don't have the guts for it though.
      - weavie 8y ago
        Perhaps you are a programmer and not an investor so you are going to have a different perspective. (I tend to agree your view btw...)
    - rm_-rf_slash 8y ago
rwmj 8y ago
> After a crash, the stock market tends to recover in a couple of quarters (think three to six). Based on recent crashes yes, but has that always been true?
- vasco 8y ago
  All crashes are recent, the stock market isn't that old.
  - candiodari 8y ago
    Unless you mean a specific market, it's older than pretty much any state in existence. Medieval European cities had stock markets. And that's assuming something like ancient Greece, didn't have a stock market, because that's possible, and if true it's older than every religion in existence today. And keep in mind that ancient Greece had an interstate cheque clearing system, shared ownership of companies, inheritance laws for dealing with such things, ... you know the sort of thing you'd expect a state to have in order to support a stock market. Lastly, we have no real idea what financial infrastructure ancient Egypt had, except of course, we do know it allowed for "international" (between partners under different governments) trade with both trading partners ~800km apart, while hiring intermediaries for passing along the goods. We just have no idea how it worked. If it happened to have a stock market, that makes the stock market roughly the age of stonehenge.
- awinder 8y ago
  No, the Great Depression lasted 10 years, from 1929 to 1939 officially (and, for instance, the djia took until the 1950s to recover to the bull market levels that preceded the Great Depression).
  - paidleaf 8y ago
    Or the japanese crash of the early 90s, from which japan still hasn't recovered. The nikkei is about 1/3 of what it used to be almost 30 years on.
rcarrigan87 8y ago
Student loan debt usually can't be discharged through bankruptcy so it's unlikely to cause some kind of panic sell-off even if the loans being made are low quality. The debt will continue to be a noose around the neck of consumer spending power. Indentured servitude 2.0.
- jjoonathan 8y ago
  Today's businesses rely, directly or indirectly, on consumer spending power. If its decline hasn't been correctly worked into the present-value-of-future-dividends (aka price) and the market corrects, the magnitude would have no difficulty rivaling or exceeding previous recessions.
  - lotsofpulp 8y ago
    As long as the people getting richer keep consuming enough to offset the reduced consumption of those getting poorer, it could work out. We just have to ignore the part where 20% of the population enjoys life while 80% go through the grind to provide for the 20%.
- candiodari 8y ago
  That's cool ... except of course the point of lending to these students is that they'll pay back installments. Now let's take the banks side, for a second. What happens in banks ? Well they lend money from the Fed (only the big ones) or from other banks (more likely) and lend it out. In return they get an income stream. They lend out X, every month X/100 comes back in, for, say, 110 months. Now what is bankruptcy ? Bankruptcy of your customer means the income stream stops, and you get a "lump sum" repayment. So that means, for example, that in month 20 of the above loan, you get 60% X, and no more income stream. That's bad, of course. (63% is a nice "global average" rule of thumb figure of what you'll get back, obviously in practice it varies and the "quality of the debt", to a large extent, is how much you can expect to get back in bankruptcy) In the case of a student loan, you get nothing. No lump sum is coming forth, and obviously the income stream stops. But you've still got the loan. So that means that you fantasize that every month you make an extra loan which covers the monthly payment for that month. Now let's assume it takes 2 years for your customer to get out of bankruptcy, to the point they can start to repay ("global average" is 1.6 years). In practice student loans are extremely bad quality debt, which is why we have this arrangement in the first place. When the customer goes bankrupt, as discussed, they pay back nothing, and it takes students, in practice, more than 1.6 years to start paying anything back. This is why we have this indentured servitude rule in the first place. So ... how does this affect banks ? Well of course, given the above, that's easy to see, at minimum for the first 1.6 years after increased student loan bankruptcies, they're screwed. In practice, more, and this will cascade: more student loan bankruptcies will force economy-wide tightening, which will cause people to get fired, which will result in student loan bankruptcies. And then we loaned out 1.5 trillion dollars like that. So, assuming the Fed can just mass-stimulate the economy whenever it wants, it's actually kind of OK, for a while. But ... wait ... at what point can they stop stimulating ? Well ... oh ... never. (you might argue at that last point : "not true", if the economic performance exceeds student loan interest rates for long enough (way longer than that 1.6 years from above), then it stops. How much is that ? 7.81 percent. How long is that ? Essentially it often boils down to double how much they're behind. When was the last time the economy did that well ? The 1950s, and ... even then, only for 3 years ... not for long enough given how far behind the average "indentured servant" is) So we can at least now understand that we ought to get mad at the people who allowed this deal in the first place. The banks ... cannot reasonably behave any different from what they're doing.
RickJWagner 8y ago
That is NOT the Captain speaking. It's someone who wants to extract money from your wallet. Run away!
- FartyMcFarter 8y ago
  What part of the article gave you this impression?
jnurmine 8y ago
"In the Black Swan, non-financial event category we could list Russia, North Korea, China, Pakistan, Iran, domestic political unrest and the Mueller investigation as market busters." Instead of Black Swans aren't these more like grey swans? Their shade can be discussed of course, some might be lighter than others.
- Bjartr 8y ago
  I think blackness here is because they are rare, not because they are bad.
  - Yoric 8y ago
    I suspect that jnurmine meant that they are not that unlikely.
    - joshgel 8y ago
      Suspect so. The fact that we can name them in advance implies they aren't that black.
  - citrablue 8y ago
    As joshgel said, a black swan isn't a rare event. We can model rare events. A black swan is an event that is by definition unimaginable. Sometimes a baked in assumption being flipped on its head creates huge effects that change everything. If you can name it, you can give it a probability and account for it in your models. Those aren't black swans.
- deleted 8y ago
  [deleted]
andrew_ 8y ago
I find it interesting that much of this advice can be somewhat applied to safeguarding personal assets (including skillset and personal skill marketability) in preparing for a down market. Many of these safeguards are recommended for individual investors. Diversity of portfolio is always important, but even more-so when a bull market has been on a sustained tear. Being at least somewhat invested in the well-funded can help offset. (YMMV but that's been my experience) Overall it's prudent for Jason to send this to his folks. At the very least it makes them aware of the possibility, if they aren't already, of a down market and puts that thought in the forefront.
syntaxing 8y ago
This has been always a question I always asks myself on a personal level. I was still in school during the recession and graduated when the economy was picking up so I did not experience the impact of the recession first hand. Now that I am older, I am always worried how I can survive with my family through the next dep/recession. Is saving up the best way to protect myself? Are there things I can do now to increase the chances of having income during a downturn?
- robbrulinski 8y ago
  In my opinion, yes saving is always a great step to take! I'd also examine any risky stocks/bets you may have and put 10-20% into bonds. I was burned by the 2000's recession right out of high school.
- iambateman 8y ago
  I’m asking the exact same question. If we expect to find ourselves in a long financial winter, what can we do? Specifically, I’m considering buying a house and renting out my current house right now...to buy or not to buy. Leveraging up is great until house prices drop by 30%. Then again, the previous recession was specifically a housing crunch, so perhaps the next recession won’t create the same housing drop. No one on this thread knows the future, but it’s hard having lived through a very long bull market to anticipate the results of what looks to be a pretty severe bear market. Hussman Funds is calling for negative total returns on the S&P500 for the next 10 years, which feels like a very long time.
  - syntaxing 8y ago
    I'm on the same boat. I have debating for the longest time if I should buy a house and everyone keeps on telling me that interests rates are going up so now is the time. But buying a house will pretty much wipe out all my savings and if I ever lose my job during a downturn, foreclosure is almost imminent.
    - jrs235 8y ago
      In many states foreclosure takes a "long" time. Making partial payments can prolong the process too. Research foreclosure laws in your state. After the housing burst there was a flood of delinquent mortgage payers. The banks didn't want to hold empty houses and were slow to go to foreclosure. Not to mention the courts were/would be swamped with them. Perhaps include these factors in your risk analysis too.
known 8y ago
"Buy into a company because you want to own it, not because you want the stock to go up; Sooner or later the market mirrors the business" --Buffet
- folli 8y ago
  "The market can remain irrational longer than you can remain solvent."
  - bluGill 8y ago
    right, which is why you never short a stock no matter how obviously overpriced it is.
- droopyEyelids 8y ago
  "I see no reason why Wells Fargo as a company — from both an investor standpoint and a moral standpoint going forward — is in any way inferior to the other big banks with which it competes" --Buffett
cs702 8y ago
Duplicate: https://news.ycombinator.com/item?id=17618431 https://news.ycombinator.com/item?id=17618431
jaxn 8y ago
The bubble that is going to pop is Ad Tech
- nixpulvis 8y ago
  I hope this is true.
dalbasal 8y ago
Kind of apropos, this struck me. "Venture Capitalists decide not to make capital calls to their Limited Partners, sometimes as a courtesy, other times the result of a directive. They know their LPs have been heavily impacted by the market collapse and don’t want to stress them more." It's interesting that when it comes to financing insiders, obligations seem to be a lot softer and more negotiable. Margin calls and capital calls. Interbank trading, where long term loans to customers are funded by daily loans to banks.

88 points by allenleein 8y ago

I've been hearing about an incoming correction since 2013. As always, no one has any clue when it is coming and the age old tenet holds true: Time in the market beats timing the market.

paidleaf 8y ago
> I've been hearing about an incoming correction since 2013 We've have 2 corrections the past 5 years. We even had one in the beginning of this year. https://www.investopedia.com/terms/c/correction.asp https://www.investopedia.com/terms/c/correction.asp What you may be referring to is a recession, which is different from a correction.

moltar 8y ago

tl;dr have money ready

skate22 8y ago
1.5 years+ of money

gatsby 8y ago

Investors frequently say things like this: “Am I at, or can I get to, profitability on the money I have?...(If so) Go raise “opportunistic money” from your existing investors at a good or great price.” If you’re profitable and believe that your customers will continue investing in you, you should think long and hard about raising more capital as “the answer.” Raising more capital is sometimes the answer, and it’s an investor’s job to convince you that raising capital is always the answer.

VBprogrammer 8y ago
That statement made me feel uncomfortable. Isn't it exactly this type of attitude that creates financial bubbles in the first place? Without a plan, or even a good reason, for that money how does it contribute to making your business more profitable or resilient to the vagaries of your market? In the short term it'll keep you afloat but that isn't going to be a big consolation when the money does run out. Stock piling cash in exchange for huge amounts of equity seems totally irresponsible.
- weavie 8y ago
  > Bottom line: In almost all of the cases above, my advice is to build a war chest of capital so that you can deploy it in the down market. What I think he is saying is that in a downturn things can get tough if you don't have enough cash to get through it, and it will be harder to raise more money if you need it. But, in a down turn everything also gets a lot cheaper so if you do have the cash then then you can really capitalize on this and emerge from it as the leader in your sector.
  - VBprogrammer 8y ago
    Yeah, I can definitely see the argument for having a war chest. Building it by exchanging a chunk of your equity for it in the hope that on the other side of the storm (what is that old fable about economists correctly predicting 11 of the last 7 down turns?) you can make that back and then some feels a little too much of a gamble. You'd have to be incredibly lucky to get the timing right. Building a war chest by maximising profitability and minimising costs I could definitely understand. Perhaps I just don't have the guts for it though.
    - weavie 8y ago
      Perhaps you are a programmer and not an investor so you are going to have a different perspective. (I tend to agree your view btw...)
  - rm_-rf_slash 8y ago

rwmj 8y ago

> After a crash, the stock market tends to recover in a couple of quarters (think three to six). Based on recent crashes yes, but has that always been true?

vasco 8y ago
All crashes are recent, the stock market isn't that old.
- candiodari 8y ago
  Unless you mean a specific market, it's older than pretty much any state in existence. Medieval European cities had stock markets. And that's assuming something like ancient Greece, didn't have a stock market, because that's possible, and if true it's older than every religion in existence today. And keep in mind that ancient Greece had an interstate cheque clearing system, shared ownership of companies, inheritance laws for dealing with such things, ... you know the sort of thing you'd expect a state to have in order to support a stock market. Lastly, we have no real idea what financial infrastructure ancient Egypt had, except of course, we do know it allowed for "international" (between partners under different governments) trade with both trading partners ~800km apart, while hiring intermediaries for passing along the goods. We just have no idea how it worked. If it happened to have a stock market, that makes the stock market roughly the age of stonehenge.
awinder 8y ago
No, the Great Depression lasted 10 years, from 1929 to 1939 officially (and, for instance, the djia took until the 1950s to recover to the bull market levels that preceded the Great Depression).
- paidleaf 8y ago
  Or the japanese crash of the early 90s, from which japan still hasn't recovered. The nikkei is about 1/3 of what it used to be almost 30 years on.

rcarrigan87 8y ago

Student loan debt usually can't be discharged through bankruptcy so it's unlikely to cause some kind of panic sell-off even if the loans being made are low quality. The debt will continue to be a noose around the neck of consumer spending power. Indentured servitude 2.0.

jjoonathan 8y ago
Today's businesses rely, directly or indirectly, on consumer spending power. If its decline hasn't been correctly worked into the present-value-of-future-dividends (aka price) and the market corrects, the magnitude would have no difficulty rivaling or exceeding previous recessions.
- lotsofpulp 8y ago
  As long as the people getting richer keep consuming enough to offset the reduced consumption of those getting poorer, it could work out. We just have to ignore the part where 20% of the population enjoys life while 80% go through the grind to provide for the 20%.
candiodari 8y ago
That's cool ... except of course the point of lending to these students is that they'll pay back installments. Now let's take the banks side, for a second. What happens in banks ? Well they lend money from the Fed (only the big ones) or from other banks (more likely) and lend it out. In return they get an income stream. They lend out X, every month X/100 comes back in, for, say, 110 months. Now what is bankruptcy ? Bankruptcy of your customer means the income stream stops, and you get a "lump sum" repayment. So that means, for example, that in month 20 of the above loan, you get 60% X, and no more income stream. That's bad, of course. (63% is a nice "global average" rule of thumb figure of what you'll get back, obviously in practice it varies and the "quality of the debt", to a large extent, is how much you can expect to get back in bankruptcy) In the case of a student loan, you get nothing. No lump sum is coming forth, and obviously the income stream stops. But you've still got the loan. So that means that you fantasize that every month you make an extra loan which covers the monthly payment for that month. Now let's assume it takes 2 years for your customer to get out of bankruptcy, to the point they can start to repay ("global average" is 1.6 years). In practice student loans are extremely bad quality debt, which is why we have this arrangement in the first place. When the customer goes bankrupt, as discussed, they pay back nothing, and it takes students, in practice, more than 1.6 years to start paying anything back. This is why we have this indentured servitude rule in the first place. So ... how does this affect banks ? Well of course, given the above, that's easy to see, at minimum for the first 1.6 years after increased student loan bankruptcies, they're screwed. In practice, more, and this will cascade: more student loan bankruptcies will force economy-wide tightening, which will cause people to get fired, which will result in student loan bankruptcies. And then we loaned out 1.5 trillion dollars like that. So, assuming the Fed can just mass-stimulate the economy whenever it wants, it's actually kind of OK, for a while. But ... wait ... at what point can they stop stimulating ? Well ... oh ... never. (you might argue at that last point : "not true", if the economic performance exceeds student loan interest rates for long enough (way longer than that 1.6 years from above), then it stops. How much is that ? 7.81 percent. How long is that ? Essentially it often boils down to double how much they're behind. When was the last time the economy did that well ? The 1950s, and ... even then, only for 3 years ... not for long enough given how far behind the average "indentured servant" is) So we can at least now understand that we ought to get mad at the people who allowed this deal in the first place. The banks ... cannot reasonably behave any different from what they're doing.

RickJWagner 8y ago

That is NOT the Captain speaking. It's someone who wants to extract money from your wallet. Run away!

FartyMcFarter 8y ago
What part of the article gave you this impression?

jnurmine 8y ago

"In the Black Swan, non-financial event category we could list Russia, North Korea, China, Pakistan, Iran, domestic political unrest and the Mueller investigation as market busters." Instead of Black Swans aren't these more like grey swans? Their shade can be discussed of course, some might be lighter than others.

Bjartr 8y ago
I think blackness here is because they are rare, not because they are bad.
- Yoric 8y ago
  I suspect that jnurmine meant that they are not that unlikely.
  - joshgel 8y ago
    Suspect so. The fact that we can name them in advance implies they aren't that black.
- citrablue 8y ago
  As joshgel said, a black swan isn't a rare event. We can model rare events. A black swan is an event that is by definition unimaginable. Sometimes a baked in assumption being flipped on its head creates huge effects that change everything. If you can name it, you can give it a probability and account for it in your models. Those aren't black swans.
deleted 8y ago
[deleted]

andrew_ 8y ago

I find it interesting that much of this advice can be somewhat applied to safeguarding personal assets (including skillset and personal skill marketability) in preparing for a down market. Many of these safeguards are recommended for individual investors. Diversity of portfolio is always important, but even more-so when a bull market has been on a sustained tear. Being at least somewhat invested in the well-funded can help offset. (YMMV but that's been my experience) Overall it's prudent for Jason to send this to his folks. At the very least it makes them aware of the possibility, if they aren't already, of a down market and puts that thought in the forefront.

syntaxing 8y ago

This has been always a question I always asks myself on a personal level. I was still in school during the recession and graduated when the economy was picking up so I did not experience the impact of the recession first hand. Now that I am older, I am always worried how I can survive with my family through the next dep/recession. Is saving up the best way to protect myself? Are there things I can do now to increase the chances of having income during a downturn?

robbrulinski 8y ago
In my opinion, yes saving is always a great step to take! I'd also examine any risky stocks/bets you may have and put 10-20% into bonds. I was burned by the 2000's recession right out of high school.
iambateman 8y ago
I’m asking the exact same question. If we expect to find ourselves in a long financial winter, what can we do? Specifically, I’m considering buying a house and renting out my current house right now...to buy or not to buy. Leveraging up is great until house prices drop by 30%. Then again, the previous recession was specifically a housing crunch, so perhaps the next recession won’t create the same housing drop. No one on this thread knows the future, but it’s hard having lived through a very long bull market to anticipate the results of what looks to be a pretty severe bear market. Hussman Funds is calling for negative total returns on the S&P500 for the next 10 years, which feels like a very long time.
- syntaxing 8y ago
  I'm on the same boat. I have debating for the longest time if I should buy a house and everyone keeps on telling me that interests rates are going up so now is the time. But buying a house will pretty much wipe out all my savings and if I ever lose my job during a downturn, foreclosure is almost imminent.
  - jrs235 8y ago
    In many states foreclosure takes a "long" time. Making partial payments can prolong the process too. Research foreclosure laws in your state. After the housing burst there was a flood of delinquent mortgage payers. The banks didn't want to hold empty houses and were slow to go to foreclosure. Not to mention the courts were/would be swamped with them. Perhaps include these factors in your risk analysis too.

known 8y ago

"Buy into a company because you want to own it, not because you want the stock to go up; Sooner or later the market mirrors the business" --Buffet

folli 8y ago
"The market can remain irrational longer than you can remain solvent."
- bluGill 8y ago
  right, which is why you never short a stock no matter how obviously overpriced it is.
droopyEyelids 8y ago
"I see no reason why Wells Fargo as a company — from both an investor standpoint and a moral standpoint going forward — is in any way inferior to the other big banks with which it competes" --Buffett

cs702 8y ago

Duplicate: https://news.ycombinator.com/item?id=17618431 https://news.ycombinator.com/item?id=17618431

jaxn 8y ago

The bubble that is going to pop is Ad Tech

nixpulvis 8y ago
I hope this is true.

dalbasal 8y ago

Kind of apropos, this struck me. "Venture Capitalists decide not to make capital calls to their Limited Partners, sometimes as a courtesy, other times the result of a directive. They know their LPs have been heavily impacted by the market collapse and don’t want to stress them more." It's interesting that when it comes to financing insiders, obligations seem to be a lot softer and more negotiable. Margin calls and capital calls. Interbank trading, where long term loans to customers are funded by daily loans to banks.