While the underlying metrics that indicate how the market is performing have been weak for quite some time, the general public is just beginning to realize just how bad things actually are.
CNBC recently reported that first-quarter GDP growth will be just 0.3%, as tariffs stoke stagflation conditions. Annual inflation remains above the Fed’s 2% target. Meanwhile, consumer confidence has plummeted to levels we haven’t seen since the pandemic and debt is sitting at historic and critical levels. Experts agree that we’re sitting on a precipice.
Noted financial expert David Phelps says that as the overall economy weakens, businesses of all types weaken as well, exposing you to greater investing risk, so risk assessment needs to evolve to better protect you in today’s uncertain environment.
You can look to institutional investors like Blackrock, Vanguard and Bridgewater for early warning signs. As Phelps explained in a recent article: “Smart money tends to move into specific sectors during economic uncertainty, and the money managers behind these financial giants will focus on capital preservation rather than growth during times like these, so when you see them moving in a particular direction, you need to treat that like the canary in the coal mine.”
While there is a tremendous amount of uncertainty in the market, it’s not all doom and gloom. That’s because times of severe economic upheaval also tend to be times of opportunity for those prepared to take bold action at the right time.
Historically speaking, we’ve seen this multiple times, including the Wall Street crash of 1929, the 1970s stagflationary period and the 2008 housing collapse, to name a few. From the proverbial ashes rises a phoenix, or in this case, multiple phoenixes.
“Only when the tide goes out do you discover who’s been swimming naked.” — Warren Buffett
What tends to happen is when the economy is strong, a lot of companies get sloppy and complacent because the business environment is easy. Cash flow and easy credit cover up a lot of mistakes, but once things start to get tougher, it becomes clearer who the real operators are.
Private equity boss, Thomas A. Carver says this is a blessing and a curse. And he knows a thing or two about running a business considering that he launched his own private equity firm, Harren Equity Partners, from scratch and grew it into a nearly $800 million dollar empire by buying and selling businesses.
“It’s a lot easier to get ‘lucky’ when the economy is good and there’s lots of money flowing around, but when things slow down and revenue becomes scarce, it’s an entirely different story,” he says.
“You’ve got to be shrewd, and you have to know your industry better than anyone else out there. It has to be bigger than work — you need to be passionate about what you do because that’s the mindset needed to dig through mountains of data and research and trade publications to find opportunities that most everyone else overlooks,” he explains.
Carver built his career on this approach. For decades, he has taken pride in devouring every bit of information he could get his hands on to make better informed decisions for the companies he invests in. That information is what gives his companies an advantage over competitors and enables them to thrive during economic uncertainty.
The Carver doctrine
“It’s not enough to just stay on top of the trends in your industry. By the time that information hits the media, you’re already behind the power curve. You need to go further upstream to get the information that leads to these trends,” he said.
“Read every line in the 10-K, 10-Q, 8-K, DEF 14As, and other key financial reports of the publicly traded companies in your industry. Research what the giant consulting firms like McKinsey and Arthur Andersen are doing with companies in your industry. Use SEO data tools to identify where and how the companies in your industry are getting their traffic. Set up Google News Alerts for key players and read every press release that comes out about your industry.”
“But look at every piece of data with a skeptical eye because almost nothing will be what it first seems on the surface,” he explained.
This, Carver says, is how you identify and act on the opportunities that can change your life.
“An economic downturn is unfortunate, but it’s also natural. It’s essentially a correction. You could compare it to a wildfire that burns through the underbrush in a forest, and in the process, clears out the mess that’s holding the trees back from growth,” he said.
“In the business world, the ‘underbrush’ is the bloated, inefficient and outdated companies that are holding back a more productive economy from thriving. It’s a necessary pain that fosters innovation and growth.
“It also creates opportunities for those that remain because it’s a chance for prepared entrepreneurs to acquire companies and assets at a deep discount, and companies often look for new vendors and suppliers during times like this, creating new opportunities for explosive growth. The financial chaos often drives innovation in new strategies, technology, and processes that can revolutionize companies, and in some cases, entirely new industries can emerge,” he says.
Knowledge is power
He emphasizes that the key to winning here is, as mentioned earlier, to know as much as possible.
“You need to be smarter, faster, and more decisive than the people you’re playing against,” he explains. He says you need to also understand your own capabilities and risk tolerance.
Carver shared a story where he invested the entire $25,000 signing bonus from his first M&A job by hosting a ticketed party on a luxury yacht. He bet on himself and it paid off in a big way, with he and each of his friends going home with over $30,000 in profit by the end of the night.
While the risk may seem tremendous to most, he was confident in his ability to generate a profit despite many others whom he trusted and respected advising him that if anything went wrong, he would likely go broke.
“You have to know how you’re going to perform under pressure. Will you step up and make it work or will you choke when you’re backed into a corner? Your answer to that tells you exactly how much risk you should take. Ultimately, risk comes down to two things: your understanding of the assets you’re investing in and your confidence in your ability to perform and to recover if you fail.” he explains.
Read more: Just Climate will put new $175 million fund to work on natural climate solutions