Don’t Miss This Huge Recession-Time Opportunity

Andy Snyder|August 24, 2022

Age has its advantages – in life and investing.

I’ve been in this game for a long time. Throughout the decades, some very clear patterns have emerged.

Other so-called trends, made popular by the financial media, are total garbage.

For example… there’s the idea that Democrats are actually better for stocks. “That’s because Republicans set the economy up for success,” the other side yells back.

It doesn’t matter whether it’s true. (It’s not.) It’s an idea that we’ll hear on repeat.

Now here’s an idea that isn’t all garbage…

It’s backed by facts. But few folks actually understand the concept… or what it means for their wealth.

It’s important. So pay attention.

Time to Get Rich

Each time the American economy enters a recession (which we are most certainly in right now), the money press hits us with the same old recycled articles.

Some of the best companies, they tell us, were started during a recession.

It’s true.

The list is rich and robust…

• General Electric (GE)
• Microsoft (MSFT)
• Netflix (NFLX)
• Airbnb (ABNB)
• Disney (DIS)
• Hewlett-Packard (HPQ)
• Hyatt Hotels (H).

There are many more… but you’re smart. You get it.

From a common-sense standpoint (I know… I’m getting radical here), it’s inevitable that some good companies will come out of a recession. Out of the thousands that are launched each year, of course some will be unicorns.

That happens regardless of economic conditions.

But there are some very real and very good reasons to put extra emphasis on one specific asset class when the economy is at its nadir…

Startups.

This is where the average, surface-level “journalism” stops. The articles that float around every few years never bother to tell readers why a company like Airbnb can get a head start during a recession… or why Hyatt was able to fight through the headwinds.

There are three main reasons.

You Know This One…

The first reason is the golden thread that’s woven through all my analysis.

Interest rates.

Longtime readers shouldn’t be surprised.

But what’s a better filter of good and bad ideas than surging capital costs?

As we’ve seen over the last decade (and especially over the last two years), just about any company can keep the lights on when free cash is hidden behind every tree and the cost of capital is nearly zero.

When loans are easy and the cost is cheap… it takes a truly disastrous idea to fail.

That is, until things slow down and the cost of capital surges. As I’ve said before, we’re about to see a wave of failures… a shaking out of the weak and lousy.

When a recession hits, things get much harder. Typically, slowdowns are synonymous with high interest rates and an increase in the cost of capital.

It takes a much stronger business to make the numbers work when a loan costs 6%… than when one costs 2%. Or, worse yet, when the government is giving money away for free.

All that free money will implode in a wave of failures as economic growth withers and crawls backward.

Of course, not all startups are funded with loans. But the second reason we get stronger entrants to the market during a recession ties right into the idea.

Good Business

It simply takes a better business to make money when spending is shrinking.

As tough as it is to make things work when spending is robust and consumers are tossing money around… it’s doubly hard when they’re burying their cash and wondering whether they’ll have jobs next week.

Given the choice between a company that made a million bucks at the peak of the economy and one that made a million bucks at its trough, I’ll take the latter every time.

Airbnb is a good example.

It was started when its founders needed some extra cash. They came up with a business model that offered two huge economic perks – their product was cheaper than the alternative and put more money in the pockets of struggling homeowners.

A company like that likely wouldn’t get dreamed up when times were artificially good.

That’s the idea that rounds us for home and takes me to my third point. The final reason we see so many strong startups during a recession is that the market gets heavy with folks with good ideas.

Now or Never

Put in far simpler terms… When unemployment surges, the unemployed get to work.

Again, Airbnb’s founders needed more cash. If they’d had secure jobs that paid fat wages, they likely wouldn’t have dared tread down the dark and scary entrepreneurial path.

It’s a crazy place.

But when your options are to live on a slim unemployment check or to try out that idea you’ve had in the back of your mind… well, it’s often not much of a choice.

So get ready for the same old news stories. You’ll be reading them soon enough.

But now you know the full story… the story that should have you itching to get into startup portals and grab a stake in the best and most intriguing ideas.

The next big ones are out there.

Be well,

Andy

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