A second short essay on the financial crisis: now is the time to invest in ourselves


Here’s a second short essay on the financial crisis. This is meant to be a positive message and a call to action.  I look forward to your responses (do hit “reply all” so everyone in the reading groups can participate).


Title: Now is the time to make long-term investments in ourselves

While this is a difficult period in our economy, it is important that we do *not* react to this crisis in the same way we responded to the years of excess: guided by our short-term reactions.  Rather, we should take this opportunity to make long-term investments in ourselves.

Let me first provide some context on the economy and on the history of recessions in the United States.

In the last decade, we were living in an artificially inflated economy – one where consumer spending (at least in the U.S.) had grown significantly over the historic average. This growth came not from fundamental improvement to consumer spending power but from increased borrowing. Consumers did not see a real improvement in their income. Instead, their indebtedness (not counting mortgages) more than doubled, their home equity dropped and the savings rate went *negative.* Consumers drained all their short and long-term assets so they could spend. Some of them lied or took advantage of easy credit to buy homes or consumer goods otherwise out of their reach. By looking at the historic average rate of consumer spending as a percentage of GDP (65%) and comparing that to the recent average (70%),  I calculate that about $550 billion a year in consumer spending has been “artificial” – i.e. over and above historic rates. It is likely to leave the economy now that the years of almost-free borrowing are over.

Consumer spending is the most important part of GDP, but it’s not the whole story. Banks and corporations of all kinds obviously also took on increased debt and increased risks (especially in the form of derivatives) and, like consumers, they are responsible for a large amount of thievery and lying. Their days of large profits gained simply from an inflated economy, more leverage and outsized risk-taking are over. Companies will have to work harder to focus more on the basics that customers care about if they are going to succeed.  I’ll note that even in the bubble years, the research we did with hundreds of thousands of customers showed that customers wanted companies to deliver on the basics. There was a wide gap between the management fads and fashions that executives focused on and the basics that customers cared about. Four years ago I called that gap the “silent crisis.”  That gap is obviously anything but silent now.

So consumers need to cut back, corporations need to refocus on basics and “deleveraging” (paying down debts). This is why this recession may be the most severe in the post-war era.

I’d like to put that last comment in perspective. The United States has suffered 17 recessions/panics/depressions since we ratified the Constitution in 1787.  On average over the years since then  we have suffered downturns every 17 years. In the post-war period, however, recessions have hit every 13 years – and while the frequency has increased, the depth has *decreased.* Our recessions have been shorter and lighter that the previous 150+ years.

This is important to keep in mind for two reasons: 1) recessions have been part of the U.S. since we officially became a country – this is nothing new and 2) even if this recession is longer than those in the last 60 years, we as a country have survived many long and painful recessions. We’ll survive this one.

But, according to a recent poll, many Americans are fearful of our future. In fact, the greed that accompanied the housing market at all levels is now only matched by fear in the opposite direction.

There are many signs today that we have too much fear. For example, a venture capital firm last week sent out an alarming message last week to its portfolio companies; a message intended to scare them into action. The content of the message was not the only issue – but their alarming tone and the lack of recognition that only months prior they had been pressuring their portfolio companies to grow faster, more, etc.

The media, of course, have been capitalizing on the fear to sell more ads. And we consumers have been eating it up. We are programmed by our evolutionary biology (our human nature) to think and react in the short-term, to seek crowd approval (by following whatever anyone else does) and to not remember what happened five minutes, months or years ago.

Now is the time for all of us who care about the world we live in to make the most important investment we can make: invest in our ability to think and reason in long-term, non-reactive ways.

Warren Buffett is a great example of the power of making such an investment. Warren Buffett’s success, according to his partner the Vice Chairman of Berkshire Charlie Munger, comes from his constant investment in his learning and thinking skills. Munger calls Buffett a “learning engine” and attributes much of his current success to what he’s learned in the last 10 years (an astounding comment given that Buffett has been wildly successful for 50+ years). Buffett has provided some of the only stability in the markets today and he has also played a calming role by reminding everyone that while this recession may be painful it will not last forever.

I am optimistic about the future because I’m investing in my own ability to think and learn. After the dotcom downturn eight years ago, I started investing in my thinking and reasoning skills. I taught myself a wide variety of key frameworks – in evolutionary biology, in value investing, in physics, in engineering, in history, in mathematics, in art. I started a reading group tackling the great books of the western tradition. I studied and read many corporate annual reports as well as the writings of business leaders I admire. I also worked on redesigning the business based on what I was learning and what I had experienced in the dotcom depression.

As a result, I saw this general recession coming and over the last five years I’ve made a variety of changes in my personal and business finances. I paid down all my debt (I’m debt-fret), created a new line of business and restructured the old business. My ability to see with long-term eyes and learn with a long-term oriented brain has given me, my family and my business some increased stability. I and we will certainly feel the pain along with everyone else for however long we live under this recession. The economy could get much worse for much longer than anyone in my generation has experienced. My preparation does not make me immune but it does put me in a better position to respond with a long-term sensibility rather than out of fear. Whatever length or depth, however, I do know one thing. By the time the *next* recession comes around, I plan to be even better prepared financially and psychically to think, reason and invest calmly.

This changing economy will certainly force all of us to lower our spending.  Even while money is flowing out of the economy (and out of our pockets), we can make the most important investment of our lives. We should not let fear guide our actions. Instead, we should seize this moment to create our own learning engines so that one day we can function in the way Pericles said Athens functioned for the Greek world – and the same way Buffett functions now –  as an example for all.


14. October 2008 by Arrian
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