Okay here we are, moving into 2009, with market and news drama exploding all around us. And through it all, we are hearing this wonderfully convenient term called 'deleveraging' being thrown about as the reason for our current state.
Well, what is it exactly? What is this demon that is creating such difficulties for us all?
Have you ever known anyone that borrowed more then he could pay back, and at the worst point, he borrowed from one lender, to pay back to another? This works for a while but eventually the bills have to be paid. That is what's happening right now.
Too many businesses and individuals were living too big a life on too little money. Buy it now, pay for it later, they chanted. The chanting has stopped. Now it's been replaced by surrender and sighs of resignation that the good old days of no accountability are gone.
What deleveraging means is that companies are cutting back, small firms are retrenching, and the healthy process of being compelled to live within your means has begun. It's painful at first. If you suddenly can't afford all those shiny toys that you bought on credit, it seems like the world is ending. It is not. You're simply just getting back to reality.
Who who wins in this process? Rational companies, rational lenders, and rational consumers. Responsibility suddenly becomes important and in fashion once again. Whereas before, companies were mocked for not taking a corporate financial bungee-jumping adventure, now risk-taking is now being penalized. Being prudent actually matters.
So what companies qualify as prudently conservative and responsible? Here's a few:
1. Berkshire Hathaway: Tons of cash, conservatively run, diversified assets, and scooping up impacted companies at discounted prices.
2. UBS : Didn't speculate in lending when others did, conservatively run, great cash flow, will be one of the survivors of the current banking mess.
3. Apple : Lots of cash, great product pipeline, conservative in projections.
Will these companies avoid the effects of our current downturn -- No. Everyone will be affected. But they will be less impacted and thus have a huge advantage. It will be easier for them to climb out of the hole when the economy gets back on its feet.
Realize that deleveraging is going to occur whether you like it or not. Buy companies that operate responsibly and have adequate capital. Invest in companies that are transparent in their results. Hold cash and commodities. Buy senior fixed income assets -- some of these positions right now are incredibly cheap.
Do as Warren Buffet does; "Be greedy when others are fearful".
Understand that challenges are coming. Still, be rational enough to take advantage of market fear. Deleveraging can be a good thing if you know what to do when the world panics.
Rational thinking is returning. Some investors will position themselves well for the recovery that will come. As is usually the case in investing, a well thought out plan not based on emotion will win the day.