“Investors should remember that excitement and expenses are their enemies. And if they insist on trying to time their participation in equities, they should try to be fearful when others are greedy and greedy when others are fearful.” – Warren Buffet, Berkshire Hathaway 2004 Chairman’s Letter
Prepare to be scared! Take this site, for example. Don’t stay too long, you may catch a nasty case of economic cowardice if you are exposed to the website for a prolonged period.
From inexplicably popular radio and television personalities selling gold coins and food hoarding kits to more mainstream news anchors spewing out economic negativity, our news cycle is awash in economic gloom. Now, I will be the first to admit that these are hard times. I have nothing but the greatest sympathy for the long-term unemployed that are out there searching for a job, and the homeowners that, through no fault of their own, saw their homes plummet in value. It’s not easy out there.
But it’s also not the end of the world, as some would have you believe. Ladies and Gentlemen, allow me to introduce you to the…
So here is a massively simplified example of the business cycle. As you can see, business fluctuates over time. There are four phases to the business cycle: Expansion, Peak, Recession, and Trough.*
- Expansion: This is the phase in which business activity increases and gross domestic product expands. It is followed by the Peak.
- Peak: This occurs after economic expansion, and is the point of highest real GDP. there are a number of economic indicators that suggest the occurence of a Peak.
- Recession: Also called a contraction, this is the phase where the economy’s real GDP declines for two or more quarters. It occurs after the Peak but before the Trough.
- Trough: Indicates the end of a period of business contraction and the transition to expansion.
Interesting thing about the business cycle is that it continues indefinitely. It has a tendency to not suddenly flatline. Let me put it this way: it’s highly unlikely that our economy and political system will suddenly collapse to the point that we will need gold hoards and freeze-dried food.
So, I see this as just another trough in the business cycle – and not the worst in American history, by any stretch. But then, this is all just my opinion.
* Like everything in life, there’s way more to the business cycle than this. I’m keeping things very straightforward and highly simplified.