Special series - how to survive a recession, part 2

Special series - how to survive a recession, part 2

Financial education here on Ideas on how to become rich!

This is my second instalment in my series on how to survive a recession, or more accurately, what can we learn from a recession and what can we do during one so that we can make money or prevent the loss of money. I do the research and present it on my site so that you can learn and benefit from financial education and so that your investments will be well informed such that you make money whenever you can and avoid losing money if possible. Here are some information and word definitions related to recessions - but in particular, these are about the great stock market crashes of the last 100 years and the words associated with the latest stock market crash in 2008.

(All investment/ stock market/ news information from the Straits Times in Singapore)

First and foremost, a recession is a period of falling economic growth, and a depression is a period of prolonged and powerful recession.

These were the great stock market crashes of the last 100 years:

1929 Great depression - which lasted until the Second World War

1973 The oil shock - which had to do with OPEC, the Yom Kippur War and much more which I will discuss in future posts in future here on my site

1987 Black Monday - a fall in the stock market when confidence plummeted

1997 the Asian Financial Crisis - the crisis caused by currency speculation, and spooked investors, and this was the particular stock market crisis I said earlier that caused American investors to criticise Asian markets - and Asians were even criticised about their political systems (but the problem is that there should be blaming here or there, because all economic systems have their own inherent pros and cons, their own inherent good parts and bad parts, financially speaking)

2001: 9/11 and the Dot Com bubble bursting - we all know this one because it was both a political crisis and also an economic crisis

2008 The current Credit Crisis which will surely go down in history - so in a sense here we are, and here I am, writing about future economic history.

The central question of "how to survive a recession" is rather simple to answer, if one takes a sufficiently long term view - all the recessions mentioned above and all the stock market crises ultimately recovered, because the business cycle operates in such a way that there will ultimately be recovery.

This second part relates to terms and words that you need to know if you wish to understand the global crisis further.

securitisation - banks securitise loans by making them into "investments" which are then sold to third parties, rather than the usual practice of banks holding mortgages

mortgage backed securities - the basis of the 2008 financial crisis, these repackaged home loans are the IOUs that third party investors bought (see earlier term for a better financial understanding)

credit default swaps - these are basically insurance policies that companies and investors bought to protect themselves from the default of the securities - the buyers of these swaps make regular payments to a swap seller, usually an insurer, in exchange for a payout when there is a default (the economic problem with AIG becomes very clear when you realise that it was such companies like AIG selling credit default swaps from banks and other investment banks so that the risks would be lower for those investment banks - but all the risks went to AIG instead)

collateralised debt obligations (CDOs/ or toxic debt) - these are like mortgaged backed securities, but instead of mortgages, these are made up of differnt types of assets, including commercial property and bons (CDOs and mortgage backed securities are some of the instruments that people call toxic debt, because of obvious reasons)

leveraging/ gearing (in Singapore we say gearing instead of leveraging, but the two terms are synonymous) - basically this is using OPM (other people's money) - the degree to which a company or an investor is using borrowed money, and the problem with gearing is that, while it is very useful on the upswing and can make you a lot of money, the converse is also true that it is not useful on the downswing and can lose you a lot of money since it works the other way as well

deleveraging - what is happening now (in 2008), as banks and companies have to put up more collateral and reduce their debt levels by selling their assets and raising capital

libor/ silbor - the london interbank overnight rate and the singapore interbank overnight rate respectively (basically, the rates that banks charge when they lend money to one another, be it in London or Singapore) - the process works the same way in the USA, in a similar manner

treasuries - treasury bonds, notes and bills - these are government bonds issued by the USA Treasury Department. These are seen as the ultimate safe haven investments because they are denominated in US dollars, backed by the US government and are very stable

derivatives - these are a class of investments that derive (hence derivatives) their value from another underlying asset, such as company stocks, allowing investors to profit from movements in the stock price without owning the stock - basically investors can take bets on anything from interest rates to stock prices

short selling - when an investor sells a financial instrument that he doesn't own, in the hope that he can buy it back later at a lower price and earning a profit - short sellers usually borrow stock to make good their promises - currently short selling has been banned in many countries because they are exacerbating the financial crisis by making it worse

hedge funds - these are private, barely regulated investment funds that manage assets using high risk high return strategies, and they often leverage / gear to get bigger returns, and they usually even engage in short selling - doing anything to make money.

In summary, here I've shown you a list of the several stock market crashes and important dates that you need to know in your financial education, and also you now know more words and ideas associated with the current stock market crashes worldwide and the recession worldwide, in 2008. One key idea is still that prevention is better than cure, and the thing about most of the financial instruments that have caused problems is that to prevent yourself from losing money, you should always be aware of the pitfalls of what you buy. Simply and beautifully put: "Rule No. 1: Don't lose money. Rule No. 2: Don't forget rule no. 1." Knowledge and more research is key and very important to surviving a recession and a stock market crash.

In my next post, I will share ideas on what to do with your cash and your money if you are afraid of the current economic crisis, by showing you options in which to place your money. The current recession caused by the financial crisis worldwide has not prevented Warren Buffett from investing in the stock market, because to him the prices of most companies has gone down and now he can acquire many good companies at cheap prices.

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