Recession: Disaster or Opportunity?

 Math is weird sometimes. Let me ask you a simple question. 

If you have $100, and you lose 50% of it, then how much money do you have? $50. 

So you're down 50% but then you get 50% of your money back. How much money do you have now?

50% of $50 is $25 so $25 + $50 = $75.

I know, took me a bit the first time too. You lost 50% and then you gained 50% but you still have less money than before? What happened? Percentages happened. Let me explain why this lesson is so important... 

When There's Blood In The Streets, Buy Real Estate

That saying above is basically a paraphrase for "buy things cheap" and they often are in disasters. The wealthy understand this because its hard to make money quickly when everything is going awesome.

So using the stock market as an example (though this applies to anything you can invest in) it's crucial to be able to buy an asset as low as possible to generate the best return.

Why? So its easier to make a more significant profit with the least amount of RISK.

The math problem I gave earlier is an example of how things work in the stock market. When a stock is doing really well, it has minimal upside and a big downside. Well that's risky. If anything goes wrong, it can drop quickly and its hard to make your money back.

If a stock drops 50%, it will take a 100% increase just to break even! Here's a look at how much you have to gain to make back a loss.

• Lose 10%, Gain 11.1%
• Lose 25%, Gain 33.3%
• Lose 50%, Gain 100%
• Lose 75%, Gain 400%
• Lose 90%, Gain 1000%
• Lose 93%, Gain 1,428%
• Lose 94%, Gain 1,667%
• Lose 97%, Gain 3,333%

The end really gets crazy. The different between losing 90% and 93% is gaining back 428%! This is how people get rich quickly. By taking calculated risks when things are down.

The Most Important Tool

Whether its a recession like the one we're in now or a singular opportunity to invest elsewhere, there is one tool that is absolutely essential in every situation to take advantage of the opportunity...

...the dollar bill sitting in your wallet. And preferably lots of them.

Specifically, I'm talking about freed up cash. That is money that you have sitting around doing absolutely nothing. It's not invested in another stock. It's not tied up in equity in your home. It's not in a 401k or college-fund. It's just sitting there like a spider in waiting, ready to pounce on an opportunity.

Mr. Wonderful aka Kevin O'Leary from Shark Tank, gave a talk one time that I was able to attend. He said that he always has 20% cash available. That way, if a fantastic opportunity to invest comes up, he can take advantage of it.

The problem is that most people don't have money lying around anywhere in any amount. If they do, its probably in an emergency fund and that money should NOT be touched for investments. This became a hot topic during the NFT and crypto boom in 2021. 

I told everyone on my podcast that I rarely ever give blanketed advice but taking your money from an emergency account to fund a speculative asset was the biggest HELL NO that I could muster.

So Is This Recession An Opportunity Or Disaster?

For me, the longer this recession plays out (within reason) the better. Why? Because I currently have about 50% of all my holdings in cash. It was closer to 75% but I had started to buy a few months ago. This will be one of the best opportunities to grow wealth in over a decade.

But for everyone else? It depends but doesn't look good. Here's some headlines...

• Disney Parks are packed and prices are being raised quarterly
• Credit card debt is at an all time (just under $1 trillion dollars)
• Amazon's Prime Day just had its best day ever a few weeks ago
• Car payments are the highest ever at $568/month
• The average saving rate is around 3% (its usually around 7%, that's a 57% decline)

Anyone that fits in these categories are going to have a difficult time making aggressive investments. 

Its hard to understand, but people continue to spend money at an alarming rate when we are at the beginning of a prolonged recession. 

Is it the hangover of being burnt out from COVID and wanting to do fun things? The lack of media coverage on the dire state of the economy due to politics? The lack of financial education in this world? All of it?

It doesn't matter. The only thing you can control is you.

So make the choice. 

Will you cut back on your lifestyle and expenses, store up cash, learn basic investing and focus on building wealth so you can live the life you want with the people you want or...

...will you just do whatever the blinded masses are doing and try to consume your way to happiness while solidifying a future where you have to work forever?