Pennies On The Dollar

In a capitalist economy, recessions are a good thing.  Just like in nature, the weak put a drag on the strong.  Well capitalized businesses can benefit from a recession.  It is their reward for being well run.

A recession or economic downturn is a painful thing.  People lose their jobs and income.  Assets are often reduced in value.  Businesses that sometimes took decades or generations of development go belly up.  But they are also a healthy process.  Excesses are reduced or eliminated. Resources are freed up for investment in more productive and new endeavors.  Efficiency is rewarded. 

Whether you are looking for places to invest, or you are an entrepreneur seeking to grow your business, a recession can be an opportunity.  Sometimes you have to take one step backward to take two steps forward. 

During the “dot-com” boom of the late 1990’s, a company called Global Crossing had been laying fiber optic cable all over the world and across the oceans in anticipation of the coming growth in broad band internet traffic.  When the boom came to an end in 2000, many firms had over extended based on current real world revenue.  Global Crossing had amassed debt of over $12 Billion, which they could not service.  They declared bankruptcy in 2002.  When they emerged in 2004, their debt was reduced to less than $2 Billion.  The bond holders and shareholders took the loss.  In 2011 they were purchased by Level 3 Communications for about $4 Billion. 

The winners were Level 3, and all of the customers who were able to send traffic on the fiber optic cables at a fraction of the cost of what Global Crossing would have needed to charge to be profitable prior to the bankruptcy filing.  This allowed many businesses to do things profitably that would not have been possible before.  The dark cloud had a silver lining.

In my own business endeavors, I have been able to benefit from the misfortune of others.  In multiple economic downturns, I have been able to add lightly used office and telecom equipment for a fraction of the cost.  I have also been able to expand office space at very favorable terms.  These helped allow me to expand my firm on a cost effective basis.  I was also able to purchase the client assets of other professionals leaving the business.  The key is having the balance sheet to be able to do it and think beyond the horizon.

There are always opportunities if you look hard enough.  GM, GE, IBM, Disney & Microsoft are just a few notable companies that were started during recessions.  Let’s find your opportunity in this one.

The Bottom Line:  Timing is everything.

–Michael Ross, CFP®

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