Tuesday, October 15, 2013

Recessions

What happens in a recession is prices (or value) of things go down and for business often what they make goes down. However, for business, some are hit harder than others. Some see little effect, especially in the consumer staple field, but sometimes, people do spend less as they buy less expensive food. Some businesses go bankrupt.

If you are an investor like me, I see that the value of portfolio goes south, but my dividends are still paid. Yes, some companies do cut dividends in a recession because they can no longer afford to pay what they have been paying. Some company's dividend stay level and some increase their dividends. My point is that, although I have lost portfolio value, I still get dividends or income. My companies generally are still making money.

All recessions are different. In some recessions, real estate values are hit or the recession is caused because real estate values go down. No market goes up forever. If you believe that you have never read history. We have also not been able to tame the economic cycle or business cycle. Yes, I know that there have been efforts towards this, but the results seem to dampen down the expansion part of the cycle, not the contraction part of it.

I am seen people extremely upset over the last recession in the US. The thing is people lost value on their homes, but the bankers still made money. In a recession, things (like real estate) lose value, but businesses, i.e. banks, still make money. For most banks in the US, business was down. Some banks went bankrupt, but the banks that were left still make money.

Since recessions are part of life and you cannot stop life from happening, you should be prepared. Yes, you can spend more in good times, but you should also be aware that good times come to an end. You should never get maxed out in debt and you should always have an emergency fund. You need to put something away for a rainy day. To try to blame someone for a recession means that you have learned nothing. We feel we are geniuses when we make money in an economic expansion and we try to blame someone else when we lose money in an economic contraction.

Most people make money in economic expansions and do not do so well in economic contractions. This is life and you cannot stop life from happening. However, you can make choices. You can choose to put something away from the next rainy day when times are good. But, so be it if you want to blame someone else for your problems. That is your choice, but does nothing to help you prepare for future problems.

Wishing that banks could not make money in recessions comes under the title of "be careful what you wish for". This would be economic disaster. The smart people do not rail against the "system". They know they cannot stop life from happening. They do try to understand it and act accordingly.

On my other blog I am today writing about Equitable Group (TSX-EQB, OTC-EQGPF)...continue...

This blog is meant for educational purposes only, and is not to provide investment advice. Before making any investment decision, you should always do your own research or consult an investment professional. See my site for an index to these blog entries and for stocks followed. Follow me on Twitter.

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