Surviving the Downturn: Expert Tips for Investing During a Recession | Sharesies

Bryce: [00:00:31] Welcome to get started investing a podcast where we help you learn to invest in 15 minutes or less. Each episode we take one real world business story and apply a key investing lesson to help you build your investor toolkit. If you're joining us for the very first time, welcome. We strongly recommend that you scroll up and start at episode one. Before we get started, just a reminder we are not financial professionals. We are here learning like you, and nothing on this podcast should be taken as advice. With that said, let's crack on. My name is Bryce and as always, I'm joined by my equity buddy, Ren. How are you going? 

Alec: [00:01:03] I'm very good, Bryce. Good to be back for this episode. The R word is being thrown around a lot by financial media, and I think it's time we define it. We discuss it and we talk about how to invest because of it during it. Okay. In this. 

Bryce: [00:01:22] Recession. Yes. Yes.

Alec: [00:01:23] Recession. 

Bryce: [00:01:24] Recession, the R word. We're going to talk today about how you can survive in the bad times and thrive in the good times. And this episode is thanks to shares. For more market news and investing resources, you can follow them on Instagram at shares. Is AEW or is the learn section on their website, which is shares is dot com dot aew. Links will be in the show notes. So Ren. What is the news story? 

Alec: [00:01:48] Yeah, well, the news story is the R word and what that means, because Twitter and financial news were abuzz this week as the White House reportedly tried to change the definition of a recession. 

Speaker 2: [00:02:04] How do you measure a recession? 

Speaker 1: [00:02:05] Listen, no one wants a recession. 

Speaker 2: [00:02:07] Joseph Biden now says we can't be in a recession. 

Speaker 1: [00:02:10] But three days before we find out if we're in a recession, the White House seems to be changing the very definition that does not define a recession. 

Speaker 2: [00:02:18] Vaguely saying we are in a recession when there is, quote, a significant decline in economic activity that is spread across the economy and that lasts more than a few months. I'm serious. The White House just did that today. A recession is two consecutive quarters of falling real GDP in the mirror in Webster's Dictionary recession, a period of temporary economic decline during which trade and industrial activity are reduced. That is exactly what a recession is. Here's the key words Buy a fall in GDP in two successive quarters. [00:02:48][30.1]

Speaker 1: [00:02:49] What the point that we're trying to make here is that we have a strong labour market which you don't normally see in a recession. [00:02:55][5.9]

Bryce: [00:02:57] Let's start should we start with what? The actual definition of a recession? [00:02:59][2.8]

Alec: [00:03:00] Let's start with what the conventional wisdom is. [00:03:03][2.8]

Bryce: [00:03:04] Which is two quarters, consecutive quarters of negative GDP growth. [00:03:09][5.3]

Alec: [00:03:10] So gross domestic product GDP measures the total output of an economy and if that goes backwards two quarters in a row. So six months. [00:03:20][10.0]

Bryce: [00:03:20] Yeah. [00:03:20][0.0]

Alec: [00:03:21] That is a recession. [00:03:22][1.0]

Bryce: [00:03:22] Yes. [00:03:22][0.0]

Alec: [00:03:24] Not according to the White House. [00:03:25][1.2]

Speaker 1: [00:03:25] We don't. I'm not going to define it from here. I'm just going to leave it to the NBER as as we have stated, of how they define. [00:03:32][7.1]

Speaker 2: [00:03:33] If you go and talk to any market participant, you say, hey, how do you define a recession? They will all say the same thing. Two consecutive quarters of negative GDP growth, period. [00:03:40][7.4]

Bryce: [00:03:41] The White House has come out with a statement that says While some maintain that two consecutive quarters of falling real GDP constitutes a recession, most people know that that is neither the official definition nor the way economists evaluate the state of the business cycle yet. [00:03:58][16.7]

Alec: [00:03:59] Now they go on to say. Instead, both official determinations of recessions and economists assessment of economic activity are based on a holistic look at the data, including the labour market, consumer and business spending, industrial production and incomes. And they close out by saying, based on these data, which sounds clunky but I guess is technically correct, based on these data, it is unlikely that the decline in GDP in the first quarter of this year, even if followed by another GDP decline in the second quarter, indicates a recession. Now, Bryce, the timing of this is interesting because Thursday in the U.S. so we're recording this Thursday in Australia. So the numbers aren't out yet. But Thursday in the U.S., second quarter GDP numbers get released. [00:04:50][51.2]

Bryce: [00:04:51] It's obviously political spin. [00:04:52][1.1]

Alec: [00:04:52] Have a guess what the numbers are going to be. Negative. Negative. So now, look, that's the new story. Twitter was abuzz. CNBC was aflame. Turns out they're not actually wrong. Turns out that two quarters of GDP growth, what we've always learnt as indicating a recession isn't actually technically right. It's just it's just usually indicates a recession. [00:05:14][22.1]

Bryce: [00:05:15] Is there a. [00:05:15][0.3]

Alec: [00:05:15] Technical. I just looked up the Reserve Bank of Australia website and they had similar language like this. Really? [00:05:21][6.0]

Bryce: [00:05:22] Yeah. I also have a political spin there. [00:05:23][1.5]

Alec: [00:05:23] I guess so. [00:05:24][0.5]

Bryce: [00:05:26] I'm pretty sure since the moment I. I started learning economics. That was the. [00:05:30][4.4]

Alec: [00:05:31] Same. That was well, I never studied economics, but you've always been telling you tell me all the time and turns out you're wrong. [00:05:36][5.7]

Bryce: [00:05:37] Anyway, let's get moving with the lesson. [00:05:38][1.3]

Alec: [00:05:39] Okay? Because I think the thing is whatev, whatever it is and what a technical recession is, what isn't a technical recession? The fact of the matter is, economic output is down. Will will be down. We're in a recession or in a recession adjacent period. [00:05:55][15.9]

Bryce: [00:05:55] Yes. If it's not a recession, it's it's something masquerading as a recession. [00:05:59][3.4]

Alec: [00:05:59] So it doesn't really matter whether technically we're in one or not, because really the economic environment is tough. And so the question is, how do we invest during a recession or recession adjacent period? [00:06:11][11.8]

Bryce: [00:06:12] Yes. And the lesson is surviving through the bad times survive through the bad time, thrive in the good times. [00:06:19][7.2]

Alec: [00:06:20] Sound so easy. [00:06:20][0.7]

Bryce: [00:06:21] It is easy. [00:06:21][0.3]

Alec: [00:06:22] Okay. Yeah. Well, tell me how. [00:06:23][1.4]

Bryce: [00:06:24] It's all about cash. It's an asset class that we often don't speak a lot about on an equities investing podcast. But in times of recession or in times that adjacent to recessions, cash is important. It applies to our personal finances, and particularly in this case, we're going to talk about how it applies to the companies that we're investing in. [00:06:45][21.8]

Alec: [00:06:46] Yeah, basically in a recession, money dries up. Cash is harder to get. In the good times, cash is easier to get. It's not easy. It's never easy. But, you know, banks are willing to lend money in the good times and then they become a lot less willing to lend in the bad times. Interest rates are going up at the moment. Credit risks is higher. It's people are more likely to default. Banks are getting worried about like mortgages and can people afford their mortgages. So banks tighten the purse strings. They're less willing to give you cash, but also investors become less willing to give you cash. They become less willing to invest. They might be losing money elsewhere. They become more risk averse. They get a little bit nervous. So the money dries up. And so whether we're talking about personal finance or whether we're talking about the companies that we're investing in, it turns out many of the lessons are actually quite similar. It's all about having the cash, having the emergency fund, having cash in the bank, and then having good cash flow to get through the bad times and then allow you to thrive in the good times. [00:07:50][64.1]

Bryce: [00:07:50] Good money habits. [00:07:51][0.4]

Alec: [00:07:51] And so what we want to do in this episode is build that analogy even further, really stretch that analogy because it turns out many of the ways that we should personally think about our money. What personal finance experts tell us is really important at times like this can actually be applied to companies as well. And so the way you think about your personal finances and the way you think about the companies you invest in actually aren't so different. [00:08:17][25.7]

Bryce: [00:08:17] Well, let's have a look at that range. So we've got. [00:08:19][1.5]

Alec: [00:08:19] Five. Let's take a quick break first so we can get some cash flows. [00:08:22][2.5]

Bryce: [00:08:25] All right. So we've got five things from personal finance experts Ren on how to manage your finances during a recession, and then we'll analogise those to steps that companies should also be taking and how you can think about the companies that are in your portfolio. So the first one, you're hitting a recession. Bulk up on your emergency fund. [00:08:45][20.6]

Alec: [00:08:46] So this is like the classic thing. You know, as we were researching for this episode, personal finance expert after personal finance expert, this is the first point in times of a recession, always have an emergency fund. In times of a recession, bulk up. You know, the rule of thumb, three months is up. Yeah. Yeah. And some of the articles I was writing say think about how you can bulk it up to six months and stuff like that. Because the logic is you could lose your job. The percentage chance of losing your job increases in a recession. Yeah. Yeah. So that's what we should do from a personal finance. Well, that's what the experts tell us. What you should do from a personal finance perspective. Turns out companies also need an emergency fund. [00:09:25][38.6]

Bryce: [00:09:25] Yeah, well, they should definitely take the same approach. Bulking up the emergency fund is essentially protecting them from less business if they're going to have less revenue coming in. In a time of recession, customers aren't spending money with them as much as they were. In good times, they're going to need to have an emergency fund to cover themselves for their three months or six months expenses, whatever time period that they that they put there. And how do we measure this rent? [00:09:52][26.5]

Alec: [00:09:52] So you'll hear about a balance sheet. And basically that's the amount of it shows, the amount of assets a company has, the amount of liabilities they have. But in that on that balance sheet, you can see how much cash they've got in the bank. There'll be a line that says cash or cash equivalents and you can say they've got $200 billion on the bank. In the bank they got $2 in the bank in the same way that we personally should have emergency funds in case things go wrong. In tough economic times, companies need that cash buffer as well. So that's one. Do they have cash? [00:10:25][32.7]

Bryce: [00:10:25] What if they're spending their emergency fund? [00:10:28][2.2]

Alec: [00:10:28] Is it an emergency? [00:10:28][0.4]

Speaker 2: [00:10:29] I don't know. [00:10:29][0.2]

Alec: [00:10:31] Hopefully, yeah. Look like if a company is unprofitable and they have no money in the bank, you get nervous if a company is unprofitable and they have they have like ten years worth of cash in the bank, they can continue to be unprofitable. Then you'd be like, all right, well, they have the the emergency fund to survive through the downturn at the moment. That's how you look at it. Yeah. [00:10:51][20.4]

Bryce: [00:10:51] Survival. All right. So the next one that the next hit from personal finance experts on managing finances during a recession is to try to ensure that if you haven't lost your job, then at least your salary or income is as stable as possible. [00:11:07][15.1]

Alec: [00:11:07] Yeah, make sure your income stream is stable. That's a key thing that personal finance experts talk about, and we can think about that with the companies that we're looking at to invest in as well. Is their revenue streams stable? Are the customers that they're selling to good quality customers that will continue to be able to buy their goods or services even in a recession? For example, the US government unlikely to go out of business no matter how bad a recession gets. So a company that sells to the US government, that's a pretty stable revenue stream. On the other hand, we saw a recent example are Shopify. Shopify people talk about as a really high quality business and what they do is they enable e-commerce businesses to set up e-commerce shops online, really high quality business, but their customers are not as strong as the US government. A lot of unprofitable e-commerce players that are struggling at the moment. And so Shopify has been struggling as a result, not because their product is bad or their business is bad, but because a lot of their customers are struggling and that means that they're struggling. So lesson number two, in the same way that we want to share up shore up our salaries, companies need to shore up their revenue streams. [00:12:27][79.4]

Bryce: [00:12:27] Number three, ensure that we're spending less than we're earning. This, I think, should apply recession or no recession, but particularly in a time of recession, make sure that what you've got coming in is more than what is going out. There is no way that you can build an emergency fund and add to it if you've got more coming out. Yeah, same goes for a company. Is the company profitable? I.e. are they spending less than they're earning? [00:12:51][24.0]

Alec: [00:12:52] Yeah. And importantly here if they're not, so many of the companies of the last few years is not profitable. But are they taking the steps to become profitable? Is that what they're focussing on? Yes, we saw that in Australia with the buy now pay later players zip. The market loved it when they said they were shutting down Singapore, shutting down some of their business units because they were like, we're going to we're going to do everything we can to become profitable in tough economic times. If you're spending more than you're earning, that's a red flag. And if a company is spending more than it's earning, that's a red flag because it's going to be. Difficult to get more money. [00:13:25][33.7]

Bryce: [00:13:26] Yeah, I would caveat as well that if you do see headlines about companies you're invested in cutting costs at, you know, times of recession don't always take it as bad news. It can be seen like as we've just said here, they're doing the right thing in a time of recession. [00:13:39][13.6]

Alec: [00:13:40] Why is that a caveat? [00:13:40][0.5]

Bryce: [00:13:41] I don't know. Just because someone might be sitting there going, oh, I'm companies. Lesson number four, paying down debt. [00:13:47][6.1]

Alec: [00:13:48] Yeah. 

Bryce: [00:13:48] Certain times of recessions. 

Alec: [00:13:49] This is a classic one from personal finance experts. The chance of you losing your job is higher. So don't have unnecessary debt because it's risky in times of a recession. Same with companies. They might lose key customers that their revenue might dry up. You want to get that debt off your books so it's just not hanging over your head. Yeah. Yeah. 

Bryce: [00:14:11] And then finally, despite all of that, continue investing for the future. So continue to add to your retirement account. Continue to take advantages of those low prices where you can. Because, you know, life doesn't stop during times of recession. It can get a little harder. And the same goes for companies they should still be looking to do, you know, investing in the future and coming out thriving on the other side. 

Alec: [00:14:34] Yeah. So in your personal finances and in the companies that you're investing in, you've got to be looking towards the future. Investing by its nature is a hopeful activity. You deferring your consumption today because you expect to have more in the future. Yeah. And in your personal finances and in the companies you're investing. And that's what you want to say because the bad times don't last. And whether the White House is right and we're in a recession or not or we're just recession adjacent, these bad times will not last. 

Bryce: [00:15:04] That's it. Survive through the bad. Thrive in the good. You want to be making sure your companies are doing the same things that you do in your personal life from a finance point of view. So a thank you to shares these who have supported this episode. As we said for more market news and investing resources you can follow shares is on Instagram at shares is you or visit their learn section on their website shares dot com dot aew Ren. Great lesson, love that one. A lot that you can apply both in your personal life and in your investing life. So we'll continue to watch the big R word and pick it up next week. 

Alec: [00:15:41] Sounds good.