What You'll Miss About the Recession

The benefits of scarcity.

Jun 6, 2014 at 1:12PM


HOBBES: Do you have an idea for your story yet?

CALVIN: You can't just turn on creativity like a faucet. You have to be in the right mood.

HOBBES: What mood would that be?

CALVIN: Last-minute panic.

When online gaming company Zynga went public a few years ago, it warned investors of a weird problem it was having. "Many of our employees may be able to receive significant proceeds from sales of our equity in the public markets after our initial public offering, which may reduce their motivation to continue to work for us," it wrote. Employees were so well paid they were getting lazy.

Mae West said "having too much of a good thing can be wonderful." But it can also be a curse. Scarcity has benefits that managers, investors, and everyday people habitually ignore.

I was talking to a colleague recently about a company that paid off an onerous debt load, freeing it from the chains of creditors. I thought this was a great thing, which seemed like the obvious response. He convinced me otherwise. "All companies should have a little debt" he said. "Just enough to keep them focused, less distracted by temptation, and think twice before blowing money on bad ideas." Too much freedom can be devastating, as trust-fund babies, lottery winners, and bored retiree often demonstrate. 

In their book Scarcity: Why Having Too Little Means So Much, Sendhil Mullainathan and Eldar Shafir write:

When scarcity captures the mind, we become more attentive and efficient. There are many situations in our lives where maintaining focus can be challenging. We procrastinate at work because we keep getting distracted. We buy overpriced items at the grocery store because our minds are elsewhere. A tight deadline or a shortage of cash focuses us on the task at hand. With our minds riveted, we are less prone to careless error. This makes perfect sense: scarcity captures us because it is important, worthy of our attention.

Nassim Taleb writes about the same idea in his book Antifragile: "The record shows that, for society, the richer we become, the harder it gets to live within our means. Abundance is harder for us to handle than scarcity."

That's pretty much America's story of the last three decades. In 2002, Alan Greenspan told Congress that "children, dogs, cats, and moose are getting credit cards." It was record abundance, where nearly anyone could buy nearly anything. It felt amazing, but nearly ruined the economy. It took 10% unemployment and a 50% market crash -- widespread scarcity -- to get people to cut up credit cards, sell the stuff the never used, and start saving money again. The prosperity of the early 2000s gave us some of the dumbest financial behavior ever seen, while the pain of the last five years brought out some of the smartest, most rational behavior witnessed in decades. 

It's hard to accept that people act smarter and more efficient when the economy is weak, because no one wants a weak economy. But it's often the case, especially among businesses. Necessity is the mother of invention, and there's evidence that entrepreneurship increases during recessions. According to the Kaufman Foundation, more than half of Fortune 500 companies were founded during a recession or bear market. The supermarket and laundromat were both created during the Great Depression as solutions to a weak economy. Penicillin -- credit with saving tens of millions of lives -- didn't go into widespread use in the medical field until World War II necessitated near-frantic scientific development. "The excess energy released from overreaction to setbacks is what innovates!" Taleb writes.

This has obvious limits. The working poor have been criticized as lazy and unwilling to take responsibility for their own success. But as Ezra Klein wrote a few years ago, these critics "don't seem to realize how difficult it is to focus on college when you're also working full time, how much planning it takes to reliably commute to work without a car, or the agonizing choices faced by families in which both parents work and a child falls ill. The working poor haven't abdicated responsibility for their lives. They're drowning in it." The poor devote so much effort to keeping their heads above water that they can't spare a second to think about how to get ahead, and scarcity of time creates a scarcity of opportunity.

But for most Americans, life is pretty good right now. And it's getting better, with scarcity on the decline. There are two big new headlines this morning: "Household Net Worth Hits Record High," and "U.S. Regains All Jobs Lost in Recession." That's great news. It's excellent news. I don't want to go back to where we were before. But there were benefits of the recessions we may miss.

Check back every Tuesday and Friday for Morgan Housel's columns on finance and economics. 


Looking for stock ideas?
Great. Andy Cross, The Motley Fool's chief investment officer, has selected his best stock idea for the year ahead. Find out which stock it is in our free report, "The Motley Fool's Top Stock for 2014." Just click here

Contact Morgan Housel at mhousel@fool.com. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information