5 Entrepreneurs Share How They're Hedging for an Economic Downturn
The best businesses prepare for the worst.
Hedging your bets is part of playing smart in business. The next economic downturn isn't a question of if, but when. That's why top entrepreneurs continuously reinforce their war chest while strategizing for the next seismic economic shift.
Five savvy members of The Oracles share how they recession-proof their businesses so they can stay at their best even if the market is at its worst.
1. Know when to hold and fold.
Smart hedging means protecting returns on investment. I own a lot of four-to-six unit income-producing buildings in and around Manhattan. When rents are high and tenants are plentiful, I reassess the mortgages on my properties and pay off the riskier ones to shore up monthly cash flow. No one knows what the financial climate will be in two to five years, so I prefer to put my real estate on strong footing now when the going is good and secure it for the next decade.
I'm also in the habit of selling off a percentage of my stock portfolio every six months and converting profits into slow and steady "old lady type" bonds. While the return isn't nearly as high, much like a cautious gambler, I like to remove some chips from the table. I sleep better at night that way.
When business is flush, I take the opportunity to pay it forward by investing in our youth. I track down smart, underprivileged kids that I believe in and pay their tuition into good high schools and top colleges. It's the modern-day version of being a good neighbor and investing in the promise of the next generation ensures all of our futures. —Barbara Corcoran, founder of The Corcoran Group and Shark on "Shark Tank"
2. Cash is king and relationships are royalty.
The market always turns. That's as predictable as the sun going up and down. The one thing you can count on is cash. Cash is king. If the government immediately imposed another 15- to 20-percent tax on you, after you moaned and complained, you'd pay it. In case of a crisis, you should be putting that same amount away for yourself. When the market turns, if you're sitting on a pile of cash, you'll be able to make more intelligent decisions while keeping your team and sanity intact.
It's also important to invest in what you know and really understand. For me, that's people, businesses, and real estate. Take your time, do your research, and don't try to hit "home runs" in every investment. I don't know any super-savvy investors who are looking for unicorns every time.
Ultimately, when things get tough, having "vendors" is very different from having "partners." Every day in my life, I'm reinventing and hitting the reset button on my most important relationships, both personally and professionally. Surround yourself with extraordinary people, because when the shit hits the fan and we're all in a foxhole, I want to be in there with people I trust. —Tom Ferry, CEO of Tom Ferry International, ranked the number-one Swanepoel Power 200 real estate coach, and NYT-bestselling author of "Life! By Design"; follow Tom on Facebook and Instagram
3. Value the bare necessities.
First, understand: the nature of capitalism means a recession is always coming. It's natural—just like your body will never have the same amount of body fat. For every action, there's an equal and opposite reaction.
To hedge your business, understand the value of inversely correlated assets. This means investing in things that are not only recession-proof but are also better when there's a recession. If you have inversely correlated assets, then the income lost by some of your products will be made up by the ones that increase in value. Put simply: your losses are covered by your gains.
To spot such assets, I look at things that never go out of style or live at the bottom of Maslow's hierarchy of (psychological) needs. A basic need is nutritious food. Currently, I'm launching a healthy food brand around grass-fed protein products. Another basic need is shelter. I'm now investing more and more in real estate because no matter what, people will need a place to live. Spread your bets: if you only have one source of income you will always be vulnerable.
Another way to hedge your business is to cut down expenses that give you zero return on investment.
Once a month, I spend one or two hours combing through expenses and prune out the ones that don't yield a return. I call it "decreasing your C's," which is consumption and "increasing your I's," which is investment. By spending on things that yield the best return, you cut out waste and increase your profit potential. —Tai Lopez, investor and advisor to many multimillion-dollar businesses, who has built an eight-figure online empire; connect with Tai on Snapchat, Facebook, Instagram, or YouTube
Diversification is key. Our first downturn came on the heels of losing a client that drove 90 percent of our revenue. When they shifted, we lost $500,000 before steadying the ship. The lesson learned was to diversify. A great analogy is to think of your business as a barstool: you need four legs to sit steadily, so if you only have one leg, there's a high likelihood you'll tumble.
It's also crucial to understand the amount of oxygen you need as a business. For every million dollars, you need at least 10 percent in the bank to cover a revenue dip. So for every 10 million dollars, you need a $500,000 credit line and $500,000 in the bank. Without this kind of lifeline, if something goes wrong, you could drown. Even when you're a bigger player, you're going to have ups and downs; plan for them. —Craig Handley, co-founder and CEO of ListenTrust; read more about Handley: This boss hires and trains his employees to quit
5. Seize the upside of a downturn.
Baron Rothschild's family made a killing in the panic following Napoleon's loss at Waterloo in 1815. Recognizing economic patterns even then, Rothschild famously said: "Buy when there is blood in the streets, even if that blood is your own." This means: the worse things seem, the better the opportunities.
At NetWorth, we buy and sell single-family houses needing repairs to purchasers who rehab and sell or rent them. When the markets turn, values are guaranteed to take a hit. That said, markets will adjust. Former purchasers now renting will push rents up. More favorable margins at purchase will offset increased risk to buyers. We've also made capital investments in new marketing technologies to improve our reach and capture market share in the event of an economic decline. So rather than hedging for a downturn, we're preparing for the opportunities it brings.
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