Don’t Predict, Prepare

The next economic storm may not be on the horizon yet, but history suggests it’s coming. Think of it like a hangover—just as a night of excess leads to the inevitable headache, prolonged market bubbles often culminate in sharp economic downturns. With the 2021–2025 period likely being the largest global market bubble in history, businesses need to prepare for what could be an equally dramatic correction.

The question isn’t whether the downturn will come—it’s whether your business is ready to withstand it. The most successful leaders don’t waste time trying to time the economy; they focus on building businesses that thrive in all conditions. Look no further than Warren Buffett or Jamie Dimon, who maintain resilience through disciplined operations and a "fortress" balance sheet.

Consider this: a 6-foot man drowned while crossing a river with an average depth of 4 feet. Why? Because averages don’t tell the whole story—extremes do. To survive the worst of times, you need to plan for the extremes, not the averages. Done right, downturns can become a strategic advantage—a rare chance to leapfrog the competition while others struggle to stay afloat.

The Foundation: Financial Resilience

Financial resilience starts with one simple rule: never rely on the “kindness of strangers,” as Warren Buffett aptly puts it. You don’t want to depend on the generosity of a loan officer or a stressed client to survive.

Know Your Numbers!

Imagine flying a plane through a storm with broken instruments—terrifying, right? Running a business without accurate financials is no different. Your financial statements and key performance indicators (KPIs) are your navigation tools. In uncertain times, they’re critical for survival.

W. Edwards Deming, widely regarded as the father of Total Quality Management, once said, “In God we trust; all others must bring data.” People can have opinions, but unless they are rooted in the right data, they can be far off the mark. Your numbers are the single point of truth for how your business is doing—an absolute must-have.

One important nuance: knowing your numbers means knowing what happened, why it happened, and where you are now. It does not mean building a 20-tab spreadsheet of projections. Warren and Charlie have spent their lifetimes studying historical data and, to my knowledge, have never made a formal Excel-type projection. Henry Singleton, praised by Charlie Munger for unparalleled strategic skills, said, “I like to steer the boat each day rather than plan ahead way into the future.” Flexibility is your greatest ally.

Have a Substantial Cash Ballast

I once read a study about businesses that had been around for more than a hundred years, in some cases several hundred years. A common trait was these businesses carried much more cash than the average firm. As Buffett says: "Cash is like oxygen. You don't notice it when it's there, but when it's absent, it's the only thing you notice." Many people want to use debt to leverage returns in good times but forget that the best purchases are made during the worst of times. As I write this (January of 2025), Warren Buffett has increased Berkshire Hathaway’s cash balance to ~$325 billion—resilience and firepower in one.

Many view holding cash during good times as a missed opportunity, but that can be short-sighted. Economic or industry downturns frequently offer chances to buy assets at fire-sale prices. The cost of holding cash is often outweighed by the significant gains from opportunistic buying during downturns. The difficulty is that this approach requires acting contrary to popular behavior: maintaining a "fortress" balance sheet when everyone else is spending and deploying capital when fear dominates your industry.

Understand Your Operational and Financial Leverage

Leverage amplifies risk during downturns. This applies to both operational and financial leverage:

Operational Leverage: Fixed costs magnify losses when revenue drops. Know how sensitive your profit margins are to declining sales.

Financial Leverage: If you carry debt, ensure it’s structured for resilience. Favor long-term, fixed-rate debt over short-term or floating-rate loans, and understand the terms of your credit lines. If you have floating debt, there is no “limit” to the worst case as interest rates can always go higher. Again, when times are good and credit spreads are low (i.e., cheap), that is the time to shape your debt profile for battle.

If you’re depending on a line of credit, make sure you understand when the bank can take it away. Many lines of credit can be taken away on the whim of the bank (and remember that banks are themselves highly leveraged institutions that don’t react well to general economic downturns).

Understanding the magnitude of your combined operational and financial leverage is key to understanding how quickly and how dramatically you need to react to reduced revenue.

Control Costs Ruthlessly

David Senra, host of the excellent Founders Podcast, often highlights how the world’s best entrepreneurs obsess over cost control. 3G, one of the biggest private equity firms in the world (also bought Kraft Heinz with Buffett), calls Bob Fifer’s book How to Double Your Profits in 6 Months or Less their Bible. The book is full of ideas (some dated) about how to manage costs.

Start by categorizing costs into:

1. Strategic Costs: Investments that directly generate revenue or improve the bottom line.

2. Non-Strategic Costs: Necessary but indirect expenses (e.g., office supplies, administrative staff). Ruthlessly cut non-strategic costs to the bone.

Success stories: Have you ever wondered why Walmart isn’t called Walton Mart after the founding family’s name? When Sam Walton started Walmart, he realized shortening the name would save millions of dollars in extra letters not needing to be built, displayed, and electrified. Amazon similarly figured out they could save $20,000 a year by taking out the lightbulbs from their vending machines. No cost is too small!

Operational Excellence: Discipline, Discipline, Discipline

Hope is not a strategy. The key to navigating a downturn successfully is to have a clear, actionable plan ready before the “fog of war.” This preparation allows you to respond quickly and decisively when challenges arise, rather than scrambling for solutions in the heat of the moment.

Create a Recession Playbook

Think of your playbook as a set of “if-then” scenarios. Plan for varying levels of severity—mild, moderate, or severe downturns—and outline specific actions for each. For example:

• If revenue drops by 20%, then... streamline product offerings, implement cost-cutting measures, and renegotiate supplier contracts.

• If revenue drops by 50%, then... initiate more drastic measures, such as temporary salary reductions or pausing non-essential operations.

This type of scenario planning ensures you aren’t starting from scratch when challenges arise. Instead, you’ll already have a roadmap in place.

Diversify Revenue Streams

The more economically sensitive your revenue is, the more you need to think about diversifying your business model. For example:

• Law firms can expand into bankruptcy or restructuring services.

• Restaurants can add delivery services or offer packaged meals.

• Wealth management firms (like mine) can integrate investment strategies specifically designed to perform well in downturns.

Diversification isn’t just about survival—it’s about building a more resilient business.

Counterintuitively, Bob Fifer argues that maximizing customer satisfaction can lead to bankruptcy. Businesses should focus only on differentiation that customers are willing to pay for, avoiding costly features that add price without value. Many organizations emphasize adding differentiation, but few are trained to eliminate wasteful extras. Building a culture that prioritizes customer needs and profitability ensures both customer and business success.

Optimize Business Processes

Efficiency becomes critical during a downturn. Ask yourself:

• AI-driven and no-code tools have improved dramatically and can handle repetitive, low-level administrative work. Using these tools allows you to free up valuable staff time for higher-impact activities.

• As you build or improve operational processes, always think about how you can build in flexibility to scale up or down quickly.

Employee Management: Balancing Empathy with Tough Decisions

In a downturn, how you manage your team can define your business’s trajectory. Employees are your most important asset, and your approach should reflect a balance between fairness and the hard realities of cost management.

Clear, Transparent Communication

Uncertainty breeds fear, and fear is the enemy of productivity. Be upfront with your employees about challenges while also providing a vision for the future. As Rory Sutherland puts it, “No matter how bad the news is, it’s better than letting people guess and imagine the worst.”

Increase your communication cadence during times of uncertainty:

• Intensify updates: Share key metrics, challenges, and progress. As Vladimir Ilyich Lenin said, "There are decades where nothing happens, and there are weeks where decades happen." If you communicate at the same, normal, speed in a crisis, you might get left far behind.

• Leadership visibility: Host Q&A sessions or town halls to show accessibility and transparency.

Cost-Cutting While Retaining Talent

When cuts are unavoidable, lead by example. For instance:

• Temporarily reduce executive salaries before touching broader payroll.

• Suspend perks or bonuses before considering layoffs.

• Implement furloughs or reduced hours as alternatives to outright job losses.

Being fair and thoughtful in your approach will help you maintain morale and preserve goodwill within your team.

Cross-Training for Flexibility

Cross-training employees to handle multiple roles can create operational flexibility while keeping your workforce engaged. For example, idle employees can take on proactive outreach to old clients or help explore new business opportunities.

Be Greedy When Others Are Fearful: Going on Offense

Economic downturns aren’t just about defense; they’re a chance to play offense if you’ve prepared well. Warren Buffett famously advises to “be greedy when others are fearful.” Downturns create opportunities to strengthen your market position while competitors falter.

Opportunities to Consider

1. Acquisitions: Distressed competitors or undervalued assets may become available at bargain prices. Build a watchlist of potential acquisition targets now.

2. Talent Investments: While others are cutting back, seize the opportunity to hire top talent that might otherwise be out of reach.

3. Customer Loyalty: Double down on relationships with key customers. Offer flexibility or discounts to strategic clients—this loyalty often pays off in long-term revenue and referrals.

4. Expand Market Share: Use cash reserves to invest in marketing or new product lines while others are retreating.

Personal and Tax Planning: A Little Self-Care Goes a Long Way

Optimize Tax Strategies

Downturns often create unique tax-saving opportunities. Consider:

• Roth Conversions: With potentially lower income and lower balances in your IRA during a downturn, this could be the perfect time to convert retirement accounts into Roth accounts, locking in tax-free treatment.

  • Remember that Net Operating Losses on your business can offset income from a Roth conversion!

• Harvesting Tax Losses: Realize losses in underperforming investments to offset gains elsewhere and reduce your overall tax liability.

Fortify Asset Protection

Economic hardship often leads to an uptick in lawsuits. Ensure your personal and business assets are protected:

• Review liability insurance for adequate coverage.

• Revisit your estate plan as many estate planning strategies double as strong asset protection vehicles.

• Explore legal structures that shield personal wealth from business risks.

Charitable Giving

Downturns are also an opportunity to give back. If you’re in a strong financial position, maximize your community impact while taking advantage of potential tax deduction

• Remember that if you give so much to charity you can’t take the full deduction, you’re able to roll over forward the charitable deduction for five years.

A downturn isn’t just a test for your business—it’s also a chance to fortify your personal financial position. Use this time to make strategic moves that protect and grow your wealth.

Conclusion: The Time to Prepare is Now

Economic cycles are inevitable, and the businesses that survive and thrive are those that prepare well in advance. This preparation isn't about dramatic, last-minute changes but rather about building fundamental strength and resilience into your business model.

Remember, the goal isn’t just survival—it’s positioning your business to emerge stronger when the economic winter ends. This requires discipline, foresight, and the courage to make important decisions before they become urgent.

Most importantly, these preparations must start now, while you still have the resources and flexibility to implement them effectively. The worst time to discover weaknesses in your business model is when you're already under stress.

As Robert Redford’s character asked in the movie Spy Games: "When did Noah build the ark? ….Before the rain." The time to prepare is when the sun is out.

Inspiration

Byte Sized Insights

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I recently listened to a podcast about money between Morgan Housel and Andrew Huberman (link.). It was an amazing conversation filled with important insights and counterintuitive thoughts. I tried to summarize some of the most useful takeaways in this short blog.

When we talk about money, it’s often through the lens of financial freedom, success, or security. But beneath these shiny promises lies a duality—a dark side to wealth that can lead to envy, dissatisfaction, and a life spent chasing moving goalposts. Yet, with intention and clarity, money can also become a tool for liberation, independence, and meaning. This paradox—money as both a burden and a blessing—is worth examining deeply.

The Paradox of Wealth: Burning or Propelling

Money, as one wise observation suggests, is like fuel. You can use it to burn yourself alive—a self-destructive force that consumes you—or to propel yourself toward your aspirations. The choice lies in how we approach it.

For many, acquiring money becomes an unrelenting treadmill. We unintentionally move the goalposts, convincing ourselves that satisfaction lies just beyond the next milestone. But this behavior is the very definition of addiction: an insatiable craving for more, regardless of how much we already possess.

The Comparative Insecurity of Wealth

It’s easy to assume that wealth brings security, but paradoxically, social insecurity often grows with wealth. I remember hearing a story from a reporter who was interviewing a billionaire (as in $1 billion) who spoke with envy about a much richer billionaire. The reporter asked "what can he buy that you can't?" and the Billionaire answered...."the mega-yacht." A man who could buy almost anything, focused on the one thing he couldn't buy. That's the default for the human psyche and it will consume us if we're not careful. We are social beings and in these days of abundance (for some) our instinctive social comparison can create insecurity that dominates people's focus. As Buffett and Munger have often repeated "it's not greed that moves the world, it's envy." In a society richer than it has ever been, even at the median level, we still struggle to escape these feelings.

Lessons from Those Who Lived the Longest

Karl Pillemer’s study of centenarians offers a sobering reminder: not a single one of the thousand people interviewed wished they had earned more money. Their regrets lay elsewhere—relationships, experiences, and missed opportunities to live authentically. This highlights a crucial question: if money isn’t the ultimate measure of a life well-lived, what is?

Defining Your Own “Right” Way to Use Money

There isn’t one universal answer to how money should be used. However, there are anchors to avoid the traps of human psychology. One such anchor comes from Daniel Kahneman, who emphasizes the importance of a "well-calibrated sense of future regret." Understanding yourself deeply and anticipating what will cause regret can guide better financial decisions.

For example, consider two extremes: the FIRE (Financial Independence, Retire Early) enthusiasts who save 90% of their income to retire by 30, and the YOLO (You Only Live Once) mindset of reckless crypto traders gambling it all. Both extremes often lead to significant regret. The lesson is to avoid rigid extremes and instead, aim for your own balance.

The Hope and Despair of Wealth

The pursuit of wealth often generates hope—a belief that it will solve our problems. But paradoxically, achieving financial success can bring despair. Will Smith once reflected on this phenomenon, explaining that when he was poor, he believed money would fix his problems. Yet, after amassing more than he could ever spend, he didn't have that crutch anymore and was left having to face his problems without the hope that money would solve them.

This cycle is common. Many entrepreneurs experience depression after selling their company. Probably attributable to the dual impact that their newfound wealth isn't, by itself fulfilling, and postpartum with their professional baby.

Extraordinary Success and Its Costs

David Senra, creator of a renowned "Founders" business podcast, profiled 350 founders and found only one he’d trade places with mathematician and hedge fund manager Ed Thorp. Extraordinary success often comes at extraordinary costs: strained family relationships, neglected friendships, and physical or mental burnout. For many, the price of relentless focus is too high.

Naval Ravikant, a philosopher-investor, once defined success as “a calm mind, a fit body, and a home full of love.” These goals are undeniably compelling. Yet, unlike financial targets, they are subjective and harder to measure. It’s easier to chase a defined monetary goal than to assess the progress of a calm mind or a loving home. This difficulty can lead people to prioritize the tangible over the truly meaningful.

Money as a Tool for Freedom and Purpose

Despite its potential pitfalls, money can be a profound force for good. It can buy freedom—time to spend with loved ones, pursue passions, or invest in health. It can provide leverage to achieve your life’s purpose or make a meaningful impact on the world. The key is using money intentionally, aligned with your values and hard-to-measure emotional/relationship goals.

Reflecting on Your Relationship with Money

How, then, should we approach wealth? Start by reflecting on what matters most to you. Ask yourself:

• Where am I chasing an easy-to-measure monetary goal over hard-to-measure, but more important goals?

• What am I spending on that is a candidate for future regret?

• What have I spent money on that I thought was going to give me joy and ended up being an infatuation?

The answers will differ for everyone. But the act of questioning—of thinking deeply about money’s role in your life—is itself a step toward liberation.

The Final Takeaway: Balance and Awareness

Ultimately, the goal isn’t to demonize money or glorify it. Instead, it’s about intentionality. Recognize its duality—its ability to either liberate or ensnare—and choose a path that prioritizes balance, introspection, and awareness. As the philosopher Seneca said, “It is not the man who has too little, but the man who craves more, that is poor.”

In a society richer than ever, the challenge is less about acquiring wealth. It’s using it wisely, avoiding its pitfalls, and ensuring it propels you toward a life of meaning and fulfillment.

The Inspiration

Byte-Sized Brilliance

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