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Start-Ups Could Thrive in Recession


Challenging times make for great companies.

A friend of mine recently decided not to purchase an investment property, despite its significantly reduced price.

I shared with her one of my favorite watchwords: "Buy stocks in exactly the opposite way that you buy fashion." In the world of fashion, you buy new things that are "in" and get rid of things that are "out." Charting an investment plan should be just the opposite - and yet most people still follow emotions instead of logic when it comes to their investments. In these turbulent times, it's essential to remember this basic principle.

For the first time in years, I'm actually starting to see value and fundamentals returning to the marketplace. By no means does that mean you should throw caution to the wind, as serious thought and analysis is more important than ever.

Here are my comments on some key market categories and their current status:

Equity Markets

Turbulence makes these tricky to trade and invest both short term and long term right now. It's much easier to identify particular sectors to avoid.

First, I am staying away from banks and the financial-services sectors, because they operate like "black boxes." There is tremendous balance-sheet uncertainty for companies such as Bank of America (BAC) and Citigroup (C); the probabilities of equity holders getting completely wiped out is too high to justify an investment.

Second, there's growing concern about pension liabilities for legacy companies such as IBM (IBM) and Caterpillar (CAT). The decline in asset values worldwide has caused pension accounts to fall significantly, introducing a contingent liability that could hurt profits for years to come. It should be noted that many pension funds have aggressive assumptions about annual rate of returns (high single digits) on pension assets that will
exacerbate the shortfalls.

Venture Start-ups

This is an interesting segment of the investing world; there are great opportunities in play. One of the best times to start/invest in a new business is in a recession. Investment capital is scarce and competition has likely thinned, decreasing valuations and increasing the potential for market penetration.

Additionally, in the current market environment, start-ups can stretch invested capital further: Human capital, leases and other costs are all much cheaper than even a few months ago.

For example, I have an investment in a start-up called iMedExchange. It's a productivity platform for physicians with a social-networking element built into the business model. iMedExchange maintains low overhead and fixed costs, allowing the company to be extremely flexible. Their business model is designed to thrive in a protracted downward economic cycle, providing the company a strong chance of growing their market share. These are important characteristics during these uncertain times.

Many great companies were started during challenging times. Hewlett-Packard was created in 1939 at the end of the Great Depression, Microsoft was created during the challenges of the early 1970s; found its footing during the rough patch of 2000-2001.

The important thing to remember is that smart capital never follows the herd. It seeks sectors with solid long-term fundamentals underserved by the mainstream.
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No positions in stocks mentioned.

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