The business cycle has gone onward and upward for ten years. That has meant positive returns for investors in equities, debt and real estate alike. The question of when it ends seems to be a perennial question. It’s a question that we hear often from clients, prospects, friends and family. Headlines can be particularly unhelpful as their news model is often reliant on triggering emotional reactions for clicks. To us, it doesn’t look like the cycle ends anytime soon. Here is why:
Many of our clients do not pay much attention to the business cycle or worry about it. They are entrepreneurs so they are used to negative cycle talk and they discount positive cycle talk, too. They believe that the cycle “just is” and that they have more important things to do or talk about. That means they keep debt in check and enough cash on hand to weather the average downturn, however unpleasant.
Technology is helping to prolong the cycle
Experts say that technology is replacing jobs and we are heading for a long, hard fall. Michael Corbat, head of Citibank, is the latest to weigh in on the subject. He says 20,000 Citibankers will lose their jobs due to technology. However, we’re not sure that this change will happen as suddenly or aggressively as the experts claim. It is very hard to replace people completely even with great technology. It also takes many people many labor-intensive hours to implement new technology solutions once they become available. The result is often a workforce enhanced by tech rather than replaced by it. That is one reason why we are optimistic about the business cycle: lots of workers are needed to install, calibrate and maintain all of this new technology. That has been true from banking to car building.
Another reason for our cycle confidence is that debt awareness is high. Borrowers and lenders can get better information about the cost of debt and the structure of loans. If there is less than a perfect match, the loans are not getting made or the loans get paid off. Car loans and student loans are more likely to lead to negative long term wealth effects on their holders rather than a short term outright crash of the total debt market. Because of awareness, both sides get choice. Awareness leads to healthy borrower-lender relations.
Who gets hurt the most
It’s not all roses and champagne even in a positive business cycle. Many assets and investments can fail in a positive cycle environment. Those with business models that are too aggressive, too optimistic, or overly indebted can lose any time. Those that require asset pricing perfection are at significant risk in all business cycle environments.
Ways to be an all-weather investor
Keep a rainy day fund is the first thing an entrepreneur does. That cash level can be stated as a percent of assets or a fixed dollar amount. Rain or shine, downcycle or upcycle, a cash reserve is necessary.
Keep investment leverage low is the next thing to do. Today, keep investment leverage at 10% or less, or 20% including mortgages. If you have no debt, consider borrowing up to 10% for investment or 20% for overall leverage.
Match the risk of your assets with the size of your liabilities. For example, does a particular tech stock represent the capital you will need to pay taxes in April? If the numbers are large, it’s probably wise to sell to reduce your risk. At large levels, leverage like this is a problem. It’s best to manage and keep an eye on these problems over time rather than try to fix them all at once.
If you would like to know more about how we collaborate with entrepreneurs through the business cycle please call us. And please don’t hesitate to share your own experiences. We’d like to hear from you.
This communication may include forward-looking statements. All statements other than statements of historical fact are forward-looking statements (including words such as “believe,” “estimate,” “anticipate,” “may,” “will,” “should,” and “expect”). Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to be correct. Various factors could cause actual results or performance to differ materially from those discussed in such forward-looking statements.”
“Historical performance is not indicative of future results. The investment return will fluctuate with market conditions.
Past performance is not indicative of any specific investment or future results. Views regarding the economy, securities markets or other specialized areas, like all predictors of future events, cannot be guaranteed to be accurate and may result in economic loss to the investor.
Investment strategies, philosophies, allocations and holdings are subject to change without prior notice.
This communication is intended to provide general information only and should not be construed as an offer of specifically tailored individualized advice.
While the Adviser believes the outside data sources cited to be credible, it has not independently verified the correctness of any of their inputs or calculations and, therefore, does not warranty the accuracy of any third-party sources or information.
Adviser does not endorse the statements, services or performance of any third-party vendor.
Unless stated otherwise, any mention of specific securities or investments is for hypothetical and illustrative purposes only. Adviser’s clients may or may not hold the securities discussed in their portfolios. Adviser makes no representations that any of the securities discussed have been or will be profitable.
Any IPO alerts are purely informational and should not be construed as recommendations to invest.
Adviser is not licensed to provide and does not provide legal, tax or accounting advice to clients. Advice of qualified counsel or accountant should be sought to address any specific situation requiring assistance from such licensed individuals.
Any case studies or hypothetical client profiles are for demonstration purposes only. They illustrate the breadth and depth of the many clients we represent at various life stages. Any similarities to actual Adviser’s clients past or present are strictly coincidental. Individual advice and results will vary based on each client’s circumstances, objectives and prevailing economic conditions.