I realized very quickly that I should have been reading these books last year. A lot of the factors that are discussed as signs of a “peak” market cycle are either currently upon us or have already happened.
In the military, we have a phrase: “You should always hope for the best, but prepare for the worst.”
Specific to a recession scenario, it is much better for you to prepare for the market to crash and nothing to happen than it is for you to prepare for the market to continue going up in value but instead a recession hits. For this reason, you should act fast and start planning for all of the “what ifs” that COVID-19 could inflict on the economy.
The reality is that you are late to the party, but it is still better late than never.
Understanding Economic Cycles
Understanding the economic cycle is critical in the big picture of investing. You need to understand debt cycles and the levers that governments can pull to cause “beautiful deleveraging” out of bubbles.
Big Debt Crises explains how inflationary and deflationary deleveraging works. If you purchase the hard copy version, it comes with three books. (Alternatively, it’s available as a free PDF.) The first explains these cycles, and the second and third books go through a number of case studies on recessions and depressions from various countries over the last century.
This is a very interesting read and will absolutely help you understand the bigger picture of economic cycles—something undeniably beneficial as an investor.
Fair warning: it’s a pretty dense read but absolutely worth it.
J does a great job talking through not only debt cycles but also which strategies work well in each part of the cycle.
The book breaks down how you can change your business during different parts of the cycle to maximize the potential return on your investments.
It also discusses how to tell which part of the cycle is approaching just by observing trends. These are not hard and fast indicators, but they are certainly things to take note of when markets are changing.
As an investor, I found these especially helpful—I’ve noticed several in the recent economic landscape and can now identify what they mean.
Warren Buffett famously said: “Rule No. 1: Never lose money. Rule No. 2: Never forget rule No. 1.”
The reason it is so crucial that you focus on never losing money is because of the effect a loss has on your portfolio. A 50% loss requires a 100% return to bring you back to zero. Conversely, a 50% gain requires only a 33% loss to bring you back to ground zero.
You need to hedge your bets and be sure that you spend time defending yourself against possible worst-case scenarios.
This series is long and full of a lot of contrarian viewpoints that are sure to make you rethink the way you… well, think.
Here’s one of Nassim’s concepts I really like, paraphrased:
Don’t be a turkey.
A turkey that is fed by a farmer for 1,000 days is always happy to see the farmer. Eventually, the turkey comes to expect that visits from the farmer mean more good food. That is all that has ever happened, so the turkey believes that is all that can, or will, ever happen. But when day 1,001 arrives, and it is the day before Thanksgiving, the farmer is not bearing food. The farmer is bearing an ax, and the turkey will learn very quickly that its expectations were very wrong.
The lesson of this story is the central problem of unexpected, “black swan” events. There isn’t enough data to reach accurate conclusions about how risk will manifest itself, and how bad it will be.
We can only measure the risk associated with what we have seen in the past. Unfortunately, that doesn’t mean worse things won’t happen in the future.
The way you think about risk will be shaped by these books. This will enable you to prepare for events that can’t be anticipated and help you think through risk more logically.
Incerto is intense and filled to the brim with information. I have become a huge fan of Nassim Taleb, and I bet you will be, too!
After you’ve researched the economic cycle and begun thinking more thoroughly about risk mitigation, it is important to continue building your financial foundation. The more money you have saved up when a recession hits, the better positioned you are to take advantage of opportunities that may arise.
And this holds true at all times—you should constantly look to improve your finances. The more of your income you can save, the better!
Set for Life takes a different, actionable approach to explain finances. Scott is currently the president/CEO of BiggerPockets. As such, this personal finance book addresses a lot of issues through the eyes of a real estate investor.
If you take his advice, you’ll surely be on your way to building a solid financial future.
Ramit Sethi wrote this book in 2009, and it became a New York Times bestseller. Tips and tricks peppered throughout the book will truly save you money if applied.
Ramit even has a script for lowering the interest rate on your credit card(s). With a short, simple phone call you can save a large amount of money by minimizing the interest on your future credit card debt.
Like Set for Life, this book found a way to make personal finance interesting. (I listened to the entire book in the car on a road trip, and it kept my attention all the way through!)
After you’ve taken some time to learn about big debt cycles and build your financial foundation, it is time to focus on honing those investor skills.
While the other books provide insight on how to avoid losing money, these books will open the door for you to earn large returns with your investing strategies.
This book will walk you through maximizing index fund contributions to include in retirement accounts. The author does a great job explaining how to automate your securities investments and remain emotionless.
At this moment, as in all potential market swings, emotions are running high. It is important not to try to guess the peak—or the bottom—of the market. You have a much higher chance of success with index funds if you just “set it and forget it.”
Even if you are a real estate investor, index funds can serve a great purpose. For example, I utilize my Thrift Savings Plan (military 401k) as an additional cash reserves storehouse. Rather than pumping $1,500/month into a savings account, where it can be eroded by inflation, I might choose to put $500/month into the cash reserves and $1,000/month into my TSP.
The benefit to this is that my Roth TSP contributions are tax-advantaged, and I’m able to benefit from a higher rate of return, on average, than my savings account.
No matter how you slice it, index funds can serve as a great way to diversify a little bit—especially if your employer matches a percentage of your contribution.
This book has saved me tens of thousands of dollars in down payments.
The tactics in this book would be beneficial to read or listen to now, in particular. If investors decide to offload their properties soon, or at any time throughout a recession, you can use creative financing to create a win-win scenario!
I strongly urge you to learn about creative financing—it is an incredible tool to have in your tool belt.
Getting the Money is a short, simple book that teaches how to network with private investors. As deleveraging happens, debt becomes harder and more expensive to obtain. The better you are at working with private investors, the better positioned you will be to capitalize on opportunities that arise.
When banks aren’t lending, you are forced to either pay cash or work with other people’s money. Learn how to do this effectively now, and start building your portfolio of potential lenders/partners.
Matt Faircloth is the bomb.com, and raising private capital is an extremely valuable skill. One could argue that raising capital is one of the most important skills you can have in life.
A common gripe I hear from real estate investors centers around a lack of capital. Take some time to read this book and solve that problem. Again, the more capital you have, the better positioned you are at the bottom of a market.
Knowledge is power. You need to read every book you can find to A) ensure you survive any market crash and B) position yourself to pounce on opportunities as they present themselves.
What books have you been reading to prepare for 2020’s recession?
Share in the comment section below.