Tuesday, December 2, 2008

By Golly, It's a Recession

Ouch. That 680 point decline in the market yesterday was a kick in the gut. Lots of continuing bad news — including the "dog bites man" announcement by the National Bureau of Economic Research that, yes, can you believe it, we're officially in a recession.

In times of market duress, I suggest that boards retreat for guidance to "Conventional Wisdom Codification" — a brilliant, and often sardonically witty, collection of some 250 principles of surviving and thriving in the credit markets. 

Here is the kind of advice that might keep your personal balance sheet as well as your company's solvent as we work through this historic credit and business contraction:

• The bottom is always 10% below your worst-case expectation.

• When everyone likes a stock, it must go down; when nobody likes a stock, it may go up.

• Price wars get worse than you think.

• If you can figure out who will get the cash inflow in a cycle, you've got that cycle beaten.

• Risk is what's left over after the bad news hits. 

The codification was originally published in the Financial Analysts Journal in 1978. With the exception of a few outdated entries, it holds up remarkably well as a survival guide. I first recommended the codification back in the September 2007 e-Briefing, right after the first big crack in the market the previous month. My original citation included a few additional investment principles and an offer, with permission of the CFA Society, to share a copy of the entire codification (page 1 pictured here). 

I well remember that first downdraft in August of last year, as I was on vacation in Boston and spent way too much time glued to CNBC in the hotel room tracking the initial carnage.

Perhaps you too can point to a moment of crystal clarity that your company and your investments might be threatened in a seriously destructive way. Let's hope we have the prospect of experiencing a similar moment that tells us that all the bombs have been dropped and we can come out of the foxholes to start rebuilding wealth in the reshaped global economy.