On staying calm in a recession

 You’re probably hearing about it every day: Inflation is still high, stocks are down, companies have stopped hiring and some have even initiated lay-offs. Many factors play roles when it comes to the economy and growth. The problem is that individuals tend to take a very up-close view of the issue.

To really understand what’s going on, we need a broader perspective. For example:

  • Broad view: Looking at long-term trends and historical patterns

As the platitude goes: History doesn’t repeat, it rhymes. What happened in the last 100 years can teach us lessons about what’s happening now. Historically, we’ve gone through periods of high growth, and periods of low growth, or contraction.

Howard Marks, a very famous investor, wrote a book about this called Mastering The Market Cycle. The book discusses how the economy historically has grown at a steady pace, on average. But there were many years when growth was higher, and years it was lower.

That’s because there’s a cycle. The economy gets stimulated by the government (like in 2020), people get excited, take more risks, and start to consume more, which causes inflation, and after this keeps going up, everything slows down again.

We might get a recession or just a slow down. We go back to lower growth or contraction. This is not a bad process… unless you took on too much risk during the boom. Think of the people who bought houses without income in the 2000s. Or the people who bought stocks and crypto with borrowed money over the last year.

During recessions, it’s not like the world ends. It’s just a slowdown. My father and I started our company during the Great Recession, which took a lot longer in Europe than in the US. It might’ve been really bad on the whole, but individual people kept moving forward.

Sure, companies and people spent less. There were many jobs lost. Companies went under. But isn’t that a part of a healthy economy? This is such an obvious thing to say, but the economy goes up and down. It’s a fact of life.

We all want that prosperous times never end and that the economy goes up in a straight line. But that’s not what has happened historically. We should accept reality, no matter how hard it is. Epictetus said it best:

Do not seek to have events happen as you want them but instead want them to happen and your life will go well.”

The good thing about the economy is that unlike a company or a person, it never dies. Like Marks says in his book, it’s a cycle that keeps moving. Up and down, up and down.

A great way to see the evidence of this is to look at the historical returns of the S&P500. Stocks went up really fast during the 50s and 60s, came down in the 70s, went up in the 80s and 90s, and came down hard in the 2000s. On average, we’ve still had 10% annualized returns.

It’s easy to let your emotions take over: “This inflation will never end, currencies are going bust, the west is declining, there’s war in Europe, we’re next, people are getting crazier.”

I do agree that life is always getting harder and more complex. But we also have to be honest and stay calm: The past decade was relatively speaking quietly. There were bad things, but not as bad as what people have gone through in the past.

We just have to carry on. Gladly, many people in our economy have that mindset. That’s what makes it unbreakable.

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