As a follow-up to my January 18, 2008, post on surviving the recession, I am posting some ideas from a segment from today’s edition of CBS News Sunday Morning.  The program featured Ben Stein discussing his recession survival tips.  Stein starts off by smartly pointing out that the government and political pundits can’t know whether there even is a recession because there needs to be six months of declining economic activity.  According to Stein, there has been only one month of such declines, and the official word on the exisistence of a recession won’t be known until mid-year.  However, Stein admits that, even without the official pronouncement of a recession, there is undoubtedly an economic slowdown ocurring right now.  So, he offers a few facts and practical tips for us to survive the coming months, with my take on them in bold:

• No recession has lasted more than 15 months in the post-war era.  In the bleakest of past recessions, astonishingly, more than 90% of willing workers were employed.  So, look for the light at the end of the tunnel.
• Stein points out that people still buy goods and services, even through a recession.  The economy is not coming to a screeching halt, despite what Wall Street thinks.

So, Stein advises the following:

• Keep a large chunk of cash available on hand to avoid selling your house into a declining market.  This is critical to avoiding foreclosure if you are laid off or face an unexpected significant expense.
• Be the first person to arrive at work and the last person to leave work, in case there are layoffs at your workplace.  Hard to do, but it works.  My husband’s company laid off half of its employees during the tech downturn, and many people cut either had personality issues or had put in a weaker performance.
• Defer major consumer purchases, like that 60 inch HDTV.  If you’re feeling insecure, this should be easy to do.
• Invest any spare cash you have in the major stock market indices, like the S&P 500.  Go against the crowd and pick up stock shares on the cheap.  Warren Buffet says “be fearful when others are greedy.  Be greedy when others are fearful.”
• Keep your chin up; the hard times will pass, as they always have.  Have hope, as always.

As Stein says, this too shall pass.  The key is not to panic and to be prepared to weather the bad times.  So, sock away those pennies, stop shopping for luxuries, and put your best foot forward at work. 

In a recent CNBC special, “Warren Buffett, the Billionaire Next Door: Going Global,” hosted by Becky Quick, Buffet explains his simple philosophy when deciding to acquire companies for Berkshire Hathaway Inc.:  he likes companies with “durable competitive advantage.”  These companies possess enormous competitive strength that will endure over decades.  Some of the companies in Berksire’s stable are Benjamin Moore Paints (founded in 1883), Fruit of the Loom (founded over 150 years ago), and See’s Candies (founded in 1921). 

In one of the interview segments, Buffet points to a picture of the Berkshire Hathaway textile mills, the company that he bought in the 1960s and now the namesake of his investment company.  Buffet recalled that the Berkshire textile mils had great workers, working equipment, and produced cloth and linings for clothing, an essential need.  The critical problem with the Berkshire textile factory?  No competitive durable advantage, which doomed the textile factory.  Buffet explained that industries like textiles, which have high labor costs and turn out a basic commodity product, don’t have competitive durable advantage.  When is the last time you bought an article of clothing that wasn’t made outside the United States?

Buffet summed it up by saying that you always should be looking for the “chinks in the armor” of a company, i.e., something that will make the company vulnerable in the next 10 to 20 years, such as high labor costs.  Buffet says that after World War II, the Berkshire textile business was as profitable as today’s pharmaceutical companies, but because it lacked a competitive advantage, the company is no longer in business.  Buffet’s philosophy is stunningly simple.  However, for today’s average investor, picking and holding a stock of a company that is a good solid business, but unglamorous, is surprisingly more difficult than falling for the stock du jour, whether it be tech, financials, or home builders.  Has anyone come close to emulating Buffet? 

As we approached the end of 2007, I spent some time reviewing my stock portfolio.  It’s part of my holiday tradition.  Over the years, I have made a habit of doing this to see if there are any tax losses that I can take to minimize that year’s tax bill.  One stock in particular was giving me a bit of heartburn.  I had bought U.S. Steel (NYSE: X) in early November of this year after doing some research on steel stocks.  U.S. Steel seemed like a good bet because, unlike foreign competitors, it was relatively insulated from recent increases in raw material prices due to the fact that it has its own iron-ore and coke supplies for its U.S. plants.  U.S. inventory levels were at historic lows and U.S. steel prices were lower than comparable products in Europe and China. There was also talk of consolidation in the U.S. steel industry, which might make U.S. Steel a takeover target, and it was trading at a discount compared to steel companies in China. 

 I purchased the stock at $102.00 a share, only to watch it plummet to $87.00 a share in the next couple of weeks.  Needless to say, the drop was severely distressing, and I began second-guessing myself about the reasons why I purchased the stock in the first place.  I started mentally beating myself up for not doing more research, and thought, this $1500.00 loss is going to hurt.  My anxiety levels rising, I seriously contemplated dumping the stock and cutting my losses.  But I ultimately held off, deciding that I hadn’t actually lost the money yet and wouldn’t do so until I sold the stock.  Thankfully, in the last month, the stock has rallied, climbing back to $119.00, as of last Friday.  I am breathing a sigh of relief, not only for the fact that the stock has come back, but also that I didn’t succumb to my emotions.  Ironically, giving in to worry and anxiety would have caused me more worry and anxiety if I had seen the stock recover, after having sold it at $87.00.  Of course, sometimes your instincts are right, as in the case of another stock that I purchased but promptly sold at a small profit because I ultimately didn’t feel good about the long term fundamentals.  However, in this case, I had done the research, and nothing had changed with respect to those facts.  Rather, it was just the market moving up and down as it does from day to day, many times without any particular reason specific to your stocks.  I was just in a tizzy because I thought I had lost $1500.00, something like what a gambler feels after a bad night at the blackjack table.  Warren Buffet’s brilliant success in the stock market is largely due to the fact that he doesn’t watch stocks go up and down on a daily basis; he buys based on good fundamentals in the stock and the industry.  This episode taught me to work on my stock-picking and stock holding skills.  Both really go hand in hand for successful stock investing.

A recent article in the New York Times (Nov. 19, 2007 NYTimes.com, “Goldman Sachs Rakes in Profits in Credit Crisis”) discussed Goldman Sachs’ uncanny ability to foresee doom and adjust investments accordingly to profit off of the panic.  The article noted the power of the risk controllers within the firm, which constantly reevaluate the firm’s investments.  This paranoic devotion to managing risk paid off handsomely in the early summer, when the firm decided to reduce its exposure to mortgage-related investments months before the bottom fell out of the subprime market in late summer.  As a result, Goldman protected its profits and increased them while others hemorrhaged red ink and heads rolled at firms like Citibank, Merrill Lynch, and Morgan Stanley.  This constant reassessment of risk/reward should be applied to any entrepreneur’s investments and business interests.  Capital is critical in starting and maintaining a successful venture.  Learning to cut your losses and walk away may be painful, but could ensure your business survival for the future.   A friend recently closed a retail store that he had invested in some years ago.  Sales were down precipitously and expenses were high and rising.  The 3 or 4 managers who had managed the store over the last several years were unable or unwilling to focus on the bottom line, i.e., increasing sales and gross margins, cutting costs, and turning inventory.  The general manager pleaded with the investor to keep the store open, contending that he could turn things around in 6-8 months.  However, the investor prudently decided to recoup his capital by liquidating assets and closing the business.  One, there was a high level of pricy inventory, high costs, and declining sales.  Also, because the investor lived six hours away, he was unable to gauge the daily operations of the store.  The store had positive attributes - it was one of two luxury retail stores in town and was a local institution for nearly 50 years.  However, the risk/reward balance was simply too high.  So, just like this investor and Goldman Sachs, constantly reevaluating business interests and capital allocation is not a bad way to go.   

We were having dinner with friends last night at a Japanese place. The conversation soon turned towards the topic of real estate investing. We have done some investing in commercial properties and are always on the lookout for new opportunities. Our friends also were interested in getting into real estate investing, but complained about how tough it was. They recounted a recent visit to the local courthouse to observe a real estate auction. However, they were intimidated by the cash upfront requirement and the dozens of people at the auction that were aggressively bidding on the properties.

We then talked about residential verses commercial real estate investing. Our friends told us that they were getting some leads from relatives on residential real estate. They felt that they wanted to focus on commercial real estate because of the hassle of residential units. However, they also lamented the fact that most commercial properties were over $1 million, out of their price range. They also commented about the lack of time they had to look for potential properties.

The message that I took from this conversation was ROADBLOCKS. How many obstacles are there to investing and starting your own business or purchasing your own assets? If we let ourselves get stopped by roadblocks all the time, no one would ever move in any direction. As I grow older (and. hopefully, a little wiser), I realize that things are not as easy as going to school, passing tests, and moving from grade to grade. Particularly for your own projects, away from your jobs and other guided processes, there is no roadmap. There certainly will be obstacles, and the thing that will separate you from your non-entrepreneurial peers is that you will define the roadmap and LEARN to get around those obstacles. That is what this website is about. It is designed to give that little kick in the behind and that little bit of inspiration when you are feeling frustrated or discouraged. It is also a bit of community in an endeavor where everyone needs some support.