In Praise Of Recessions

Even though we don’t know it yet, experts predict that we are already at the start of the next Great Recession. There are two ways to approach a U.S. economic downturn: 1) with fear and loathing or 2) with a healthy optimism. In this Self-Storage University podcast we’re going to explore some positive attributes regarding recessions.

What is The Self Storage University Podcast?

Welcome to the Self-Storage University Podcast, where you will learn the correct way to identify, evaluate, negotiate, perform due diligence on, renegotiate, finance, turn-around and operate self-storage facilities. And your host is a partner in one of the largest real estate portfolios in the U.S. with nearly $1 billion of holdings, Frank Rolfe.

I'm in my 60s, and I've been through most of the major US recessions. I was there for the oil and gas crisis in the 70s under Carter. I was there for the Texas savings and loan crash in the late 80s. I was there for the dot-com bust in 2000. And of course I was there for the Great Recession. And there's another one coming right around the corner, and your mindset on what you do as we approach that is very important. This is Frank Rolfe, the Self Storage University Podcast. We're going to talk about recessions. It's not a topic people like to talk about very much, but I do because I've been through so many of them, and I've learned over time there's two ways to approach them. You can approach them with fear and loathing, or with a positive outlook. Positive outlook, and you can make lots of money. Fear and loathing, no, you won't. In fact, it can be a very unhappy time of your life. So how can you approach a recession in a happy way? How can you see promise in a recession?

Well, let's first look at the quote by Henry J. Kaiser, the founder of the steel industry. He once said, "problems are only opportunities in work clothes." So what did he mean by that? He meant that bad times yield opportunities. He was known to buy steel factories during cyclical recessions in American history, because he could buy them for a penny on the dollar. He didn't buy anything during good times. He couldn't. Everything was too expensive. There's no money in it. But let a big old recession hit the US, and oh yeah, he was out there buying another steel factory. So recessions often are good because they unlock potential deals. Now, let's look at another quote about recessions. This one comes from Winston Churchill. Churchill is the guy that saved Britain during World War II, fantastic leader, had a very, very strong presence in the country at the time when they thought an invasion by Germany was imminent at any moment. But he kept people focused, made them feel proud, made them feel secure, like they could win the war.

And here's what Churchill had to say about recessions. He said, "when you're going through hell, keep going." And what that means is just keep showing up and doing the work, even in bad times, because they pass. They run in cycles. I can tell you that myself from having been through most of them. They're not a forever thing. It's sad when you see people maybe kill themselves over the recession, because if they just waited a little longer, it always pulls out. That's the cyclical nature of America and its economy is things get bad, and then it starts getting good again. So hang in there, keep going, because it will, in fact, end. Now, the next concept of why recessions are good comes from none other than Conrad Hilton. Now, Conrad Hilton, if you've ever read his book, you find that he's such a remarkable story because here's a guy that kind of invented the concept of the luxury hotel. And then he lost them all. He started building hotels, hotel towers in the 1920s.

Then here came the Great Depression and wiped him out. He lost every single hotel that he built. So he was the father of the industry and had it all ripped away from him. And he came up with a concept from the Great Depression, which had taken all of his hotels away. And he took it to heart and he ultimately bought not only all of them back, but he just kept going on with a vengeance, buying up every hotel he could humanly find. Every large hotel in America ultimately was owned by Conrad Hilton in every major city. And here was Hilton's thought on recessions. He thought recessions are very powerful because it allows you to buy things for a penny on the dollar. And he realized there was no point to building any hotels going forward. Just hang around for recessions and then buy them for next to nothing. Because he had seen that. He had witnessed that happen firsthand with his own empire when it was all taken away, but then he was able to buy it back for a penny on the dollar.

In fact, if there had not been a recession, Hilton would have never been nearly as good a business person because he had a whole lot of debt on those hotels when the recession hit. So back in 1929, when the market collapsed, he had a lot of debt on those big skyscrapers. But when he bought them back for a penny on the dollar back in the 1930s, he didn't have that much debt on them. So he had much, much greater cash flow, much, much greater security. So he found recessions are basically a good thing because they give you a buying opportunity to buy things for less than construction cost. And you'll definitely see that in the self-storage industry when the bust hits, particularly in urban markets. You're going to see these things selling for a fraction of what people paid to either buy them or to build them in the past. And then finally, let's turn to J. Paul Getty. People don't know who J. Paul Getty is in the modern world. And it's kind of sad because J. Paul Getty was basically the Warren Buffett of the 1950s and the 60s. He was the richest man in America, starting out in the oil industry, but then he segued into many other industries. He built fighter airplanes during World War II.

He had factories that built mobile homes. He did all kinds of stuff. And J. Paul Getty loved recessions. If you read one of his biographies or autobiographies, you will find that nobody looked forward to recessions more than Getty. Getty got all giddy with excitement when downturns were lurking around the corner. Now, why is that? Because Getty had this fundamental idea that it was a great way to cleanse your business, that there's no better way to scrape the barnacles off the boat than when times were bad. So the way Getty looked at it is that recessions were kind of like taking a shower for your business. Because when times were bad, you tended to get rid of all the people who were not producing, all the things that don't make any sense. You ditched all those things out of necessity. And then when the economy returned, you had a much stronger and healthier business. I remember back at one time, I had a dinner with a guy. He owned a giant fence products company in Dallas, Fort Worth. And he told me the story of when he was so depressed. It was back during the 1980s Texas Savings and Loan Crash.

And his sales had plummeted. He wasn't selling anywhere near the fence he had and yet he had all this overhead, massive amounts of payroll, he had trucks, everything. And he got so fed up one day, he said, I'm just going to start from scratch. And he opened his desk drawer, and he took everything out of the desk drawer. And he said to himself, is this helping me make money? Or is this hurting me? So he pulled out a pencil, that pencil, the eraser was missing, he'd say, well, this is a stupid pencil, he'd throw it in the trash. He pulled out a pen, he'd take the cap off, he'd find that the pen was almost out of ink, he'd throw that in the trash. When he got done with his desk drawer, he just kept going. All the way around the office, he would ponder, is this person making me money or losing me money? Let me look at how many sales they've had. We're not selling anything. My payroll on them is more than they're actually bringing in. He'd let him go. Then he'd say, do I really need to have this assistant here? And maybe the answer is no. He'd go out in the field and say, look at all the trucks I have. Wait, that truck is really, really old, it breaks down all the time. I don't need that truck anymore, I'm going to sell it.

And he told me it was an awakening for him. When he emerged from the Texas Savings and Loan Crash, he was a much better person with a much better business. And J. Paul Getty saw it the same way. He saw that recessions actually are a fundamentally purifying moment to make your business all the better. The bottom line to it all is that you can look at recessions in any light. You can look at them as something that's terrible, that will ruin your life. Or you can look at them as basically great things, buying opportunities and different ways in which you can improve your business. And of course, there's no money in being the pessimist. If you look at the recession and say, ah, well, I can't buy anything, times are terrible, well, you won't make any money doing that. But instead, if you look at the recession, say this is the opportunity to get on the ground floor, to buy things at a huge reduction from that premium that people were paying not that long ago, then you'll find you actually will embrace recessions. By looking at the good attributes to them, it will empower you to be optimistic and do a better job. This is Frank Rolfe, the Self-Storage University Podcast. Hope you enjoyed this. Talk to you again soon.