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How to run your business and invest during slow economic times

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January 12, 2011

How does our current recession (or, more likely, soft depression) compare with the Great Depression? For an excellent account of the United States' last go-round with economic collapse, I'd highly recommend The Great Depression: A Diary  by Benjamin Roth.

Roth is a Youngstown, Ohio, based attorney who details a compelling play-by-play of the Depression, spanning from 1931 to 1941. A highly intelligent and intellectually curious individual, Roth not only provides us with a look at what life was actually like during that time, but also attempts to fill in the pieces and anticipate when things will actually get better, based on an extensive amount of economic reading he does concurrently with his experience.

I'd like to highlight a few of the key themes that I found interesting and relevant for us.

Cash is king - before, during and after the crash

The drum that beats throughout Roth's diary is that during the Great Depression, cash was truly king—namely because nobody had any. There were asset bargains to be had, for sure, and often Roth was able to pick out what he knew were outstanding values in stock prices. But he was usually unable to pull the trigger due to lack of cash—his law practice was limping along, and he had no dry powder in reserve.

But how do you make sure you do have cash? Roth believes the only way to do it is to "cash out near the top and put holdings in government bonds" (which were actually still safe cash equivalents in the 1930s). Of course: easier said than done. And it'd have taken real guts to cash out of stocks in 2006 when everything looked quite sanguine. But the moral of the story appears to be that in order to be able to step in and buy when the blood is gushing in the streets, you need to ensure you have dry powder available, and the time to raise cash is during the boom.

Stock prices and business "fundamentals" are two different things altogether

Every upturn in stock prices seemed to occur without any concurrent improvement in general business conditions. So while the initial 1929 crash led (and/or caused) the initial downturn in the economy, there were little or no clues to be had about the direction of the stock market if you only looked at Main Street (sound familiar?).

The 1932 stock market upturn, off of what ultimately proved to be THE bottom, was "fast and furious," as described by Roth, completely taking him by surprise. His law practice stayed in the tank for a decade or longer, with no measurable, sustainable signs of improvement. So any armchair economic observer who tried to search for undercover business improvements as potential tip offs to a stock market rise would have been left frustrated—and probably flat wrong too.

If there was a stock-buying approach that would have worked then, and now, it'd have been to buy stocks when they looked cheap— WITHOUT margin—and hold them for a long time until they appreciate to fair value. Sounds pretty boring, I know, but the few folks who did it made an absolute killing according to Roth. Most weren't able to do this, though—most, like him, had no spare cash. Those that did often levered up with margin, and were wiped out during a subsequent crash.

Roth's general conclusions from the great depression

In 1937, our guide penned some general conclusions he was able to draw from the depression that "just ended”; while the double-dip after 1937 later showed that the depression actually had not ended, I found Roth's points to be excellent:

1.       While many law practices suffered throughout the depression, Roth believes the lawyer who "specialized in bankruptcies, receiverships and reorganizations reaped a harvest throughout the depression." Moral of the story: Depressions are times to pivot your business. Don't be wed to the status quo.

2.      "Cash is king in every depression. A small investment in real estate or stocks or bonds in 1932 would be worth a fortune today. Few men had both the cash and the courage to buy when things looked the bleakest."

3.      "During the past depression, prominent bankers, business men, etc. were all wrong in most of their predictions. Use your own judgment and do your own thinking." (Emphasis mine)

My conclusions and comparisons with today's depression

1.       If you compare Roth's account with today's conditions, it'd be tough to conclude that we are heading for another Great Depression. From a general-feel standpoint, the current climate sure seems to rhyme more with Japan's recent/current soft depression and lost decades.

2.      While cash is certainly king, I think cash FLOW is emperor and master of the universe. A lump pile of cash is awesome, no doubt, especially when bargains are to be had. But an investment that can spin regular cash flow back your way, like a business that continues to run and churn during soft economic times, is the best thing you can have. Cash flow is a "great to have" during all conditions, inflationary or deflationary.

3.      Don't get too spun up trying to predict the future. It's fun, but it's also often a fruitless venture. Stay lean and stay mean. Don't saddle yourselves with long term obligations. Stay away from margin and levered bets. In the startup world, we have a term called "lean startup", which refers to the philosophy of doing just enough to make it to your next milestone—so that wasted effort is minimized. Depressions are perfect times to adopt "lean living" and “lean business” principles, where you only plan for the next six months or year at most, while staying lean and agile in your occupation, living conditions, business and personal finances. Conserve your effort and resources as best you can, and be prepared to pivot if the situation changes!

Brett Owens is chief executive and co-founder of Chrometa, a Sacramento, Calif.-based provider of time-tracking software that records activity in real time. Previously marketed to the legal community, Chrometa is branching out to accounting prospects. Gains include the ability to discover previously undocumented billable time, saving time on billing reconciliation and improving personal productivity. Brett can be reached at 916-254-0260 and brett@chrometa.com.

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