Written by: Alan Ho
I’m writing this article on the eve of the US elections. As an engineer and entrepreneur, I’m writing this article as much for me as my fellow technologists. This blog is split into two parts – what the Trump win means on a macro level, and what a technologist should do to maximize both their career and financial success.
To give some background, I’m 37. I’ve been through 2 recessions (2001 and 2008). I’ve been at startup companies that went bust (Triant Technologies), big companies that did well (Amazon). I’ve made money (housing market in 2010), and lost money (housing market in 2006, quitting Amazon in 2010). I’ve started my own company, and been through 2 acquisitions. I haven’t figured it all out, but I’ll share what I learnt so far.
Impact of Trump at a Macro-Level
The impact of populism
To many technologists, the most shocking thing about this election is the number of people who support Donald Trump on the basis that free trade and elitism is the cause of their misfortune. Job loss is real, but the reality is that job loss is coming more from automation rather than competition and free trade. This kind of populism hasn’t delivered great results in the last century, and is the cause of events such as communism and more recently Victor Chavez’s rule in Venezuela. Although I don’t think it will be as bad in America, the impact of populism is inevitable :
Winter is coming
The result of Trump’s win is likely to trigger an accelerated recession. Here are 2 effects that is likely to happen:
Expect economic downturn will begin due to volatility
The immediate effect of the Donald’s win will be investors pulling out of the stock market because they simply don’t know what to do. This is likely to start hurting the very population that Donald relies on support.
The market is already due for a correction because of overly low interest rates. As we see investors pull out of the market, the fed cannot wave a magic wand and lower rates like they usually do. This is likely a freeze in the credit market.
Trumps Trade Policies will trigger a recession
Pressured to do something by his supporters, Trump will likely enact his promised campaign changes to free trade. Like Victor Chavez’ economic policies in Venezuela, this populist thinking, coupled with the Senate + House majority will allow Trump to make his changes happen swiftly. This swiftness is likely to generate even more volatility, further adding to investors pulling out.
Expect significant wealth transfer to technology companies
The downturn will likely strengthen, not weaken tech company’s competitive advantage. There has been a gradual shift for a majority of market cap to move to technology companies in the United States, and despite recession, there are no market forces that will dampen this trajectory.
What is likely to happen, just like in 2008, many of these tech companies will suffer a temporary dip in stock prices, but as the economy recovers, they will surge in revenue. Take a look at Amazon’s and Google’s stock price as it entered and came out of the recession:
Here is what happened:
- Both Google and Amazon experience a halving in their value as they entered the recession. Fundamentally though, both companies had very robust businesses and help companies “save” money.
- Companies with dividends lost less value going into a recession, but their gains where anemic after the recession.
- For Google, programmatic ads were far superior to regular advertising because not only can you calculate ROI from your ad spend (something that becomes super important when you are in a recession), but increasing number of eyeballs were moving toward the internet.
- For Amazon, growth engines came from AWS and Amazon Marketplace. For small businesses, launching on Amazon’s marketplace (complete with fulfillment) is a far more cost effective and safer option than going brick & mortar. Likewise, because the of the recession, companies with IT needs flocked to AWS for its low prices + ability to not make big capex investments – something that really helps when there isn’t a whole lot of credit to go around.
- Apple is another example of a company that capitalized on the recession by introducing “affordable luxuries”. When the recession hit, people stopped buying BMWs. But those people who want to buy a BMW would gain “similar joy” when acquiring an iPhone
Lastly, in a recession, consumers are far more “value savvy”, and are less swayed by marketing. For traditional companies (think Procter and Gamble / GM), they live and die by their marketing (hence their marketing spend). For tech companies like Amazon and Google, marketing is a “nice-to-have”. Top tech companies have the luxury to lower their investment in marketing whenever they want.
What this means is SIGNIFICANT wealth transfer from traditional companies to technology companies. It isn’t inconceivable that after the next recession, that instead of the to 5 companies dominated by tech, I predict the top 50 companies in terms of market cap will be tech.
Another observation about technology is that CEOs / founders still own a massive portion of these tech companies. This represents yet another form of massive wealth transfer – from the middle class to the very top.
Lastly, to make matters even worse, Automation is likely to see any jobs taken away will never come back.
Key Takeaways :
- Trump’s win & misaligned populist views will usher another recession
- Massive wealth transfer from traditional companies to tech companies will occur
- Massive wealth transfer from middle class to the elite will occur
- Automation + wealth transfer = stagnant economy & slow recovery
So how can I be successful as technologist ?
The sad reality that I came to is that the world is more of a zero-sum game than I care to admit. Looking at the last 2 recessions, I’ve made several CRITICAL financial mistakes that I could have avoided. At the same time I made some GREAT financial decisions too:
Here is what I did wrong:
- Didn’t buy enough property during the downturn
- Moved from a product driven company to a sales driven company
- Didn’t understand the TRUE definition of Entrepreneurship
Here is what I did right:
- Used my free cash flow to buy property in 2010
- Started and sold my startup (Instaops) to Apigee during economic recovery
- Stayed married and supported my wife’s career
I’m going to go through PAINFUL detail of how my mistakes lead to loss of money, and what I would have done very differently.
Didn’t buy enough property during the downturn
Both in 2002 and 2008 recessions, I had the opportunity to buy property. I hesitated in 2002 because I was just out of school, and even though I had a stable job as an engineer, I didn’t take the plunge and buy property. The biggest blunder was not buying a condo in Vancouver in 2003 – probably 1/6 the value of today. Part of me was because I wanted to have “financial independence”, but what I really should have done was suck it up and borrowed money from my parents. My wife and I didn’t make the same after the 2008 recession, and bought property in Austin. That turned out to be a great investment. The problem is that I didn’t buy enough – especially considering we were dual income at the time. I had enough free cash flow to afford another income property like a condo or even a small commercial property. Property only works if you have money to buy 2 properties, because you got to live somewhere. I made a second mistake of paying off our mortgage, which not only prevented us from saving on taxes, AND reduced our free cashflow to the point that we could not own another property. Because of low interest rates and borrowing ability – buying property is one of the best ways to take advantage of a down market. The biggest lesson here is I didn’t use my free cash flow properly.
Moved from a product driven company to a sales driven company
One of my MAJOR mistakes is moving from Amazon to Dell in 2010. At the time, Amazon was a $100 stock. Today it is $800. That however wasn’t the mistake – what I failed to realize was that I was moving from a company that values engineering over sales. This was a critical flaw for 2 reasons :
- I’m first and foremost an engineer – so I will ALWAYS be valued less at a sales driven company over a product driven company
- The wealth transfer from sales driven companies to product driven companies will only continue
While it is true that no company can survive without one or another, understanding personal alignment & general trends is critical to financial success.
Not understanding the TRUE definition of Tech Entrepreneurship
Most engineers (including me) have the misconception the entrepreneurship is all about creating new value through new technology + willingness to take risk. However, thisis a fundamentally flawed view of the world. A much better definition of entrepreneurship was defined in the 18th century by Jean Baptiste Say :
An entrepreneur is someone who earns profits by shifting resources from areas of low productivity to areas of high productivity
In terms of pure resources, my main assets are time, money, and experience. When moving these resources from a large company to a startup company, you’ve got to make damn sure that where you are moving from is significantly lower productivity than your startup company.
That was probably a pretty easy decision when quitting Dell to start Instaops, but quitting Amazon (or now Google) to create a company won’t make sense unless the ideas that is being executed on can yield huge productivity for society. This is extremely hard to do since Amazon or Google has HUGE scale and is highly “productive”.
Although the best startups are built during a recession (AirBnB / Uber / etc), the reality is more sure path is to build a startup on the upswing. In this respect – I was very lucky with InstaOps. The reason why starting a company just after a recession is because it provides much optionality for a profitable exit.
I’ve seen more finances, careers, and businesses destroyed by broken relationships than anything else. More important than money, investing in this relationship is likely to gain you the best gains for career and finance. Kimmy – I love you.
My Advice in a Post-Trump World
So here is my advice to technologists in a Post-Trump world.
- If you are in a startup that isn’t making money, eject and move to a product centric company that is economically viable and can provide you a steady source of income.
- Economically viable != profitable. Uber is economically viable. Whether it can justify its 26B valuation is a different story, but it can be a source of Free Cash Flow
- Start maximizing your free cash flow now in anticipation of lower house prices so that you can own at least 2 properties. You can do this by lowering your rent, not getting into debt, etc.
- Pay attention to how wealth transfer REALLY works in society (between companies, between middle class to the 0.01%)
- Start working on the next “big idea” now and get it ready to launch it post recession. Its going to take you several iterations to find the right combo of team and the right idea. Whether you launch your own company, or lead a product team within your current company, its all the same.
- Have a really strong drink – the election are over !!!
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