Invest During Recession to Reap Abnormal Returns

Authors

• Narayana Rao

Published

Creative Commons Attribution 3.0 License

Version 4

Last edited: 03 Dec 2008

Exported: 26 Nov 2011

Original URL: http://knol.google.com/k/-/-/2utb2lsm2k7a/549

Knowledge@Wharton recently included an article on advertising during recession.

 

According to the article, research shows that companies that consistently advertise even during recessions perform better in the long run.

 

A McGraw-Hill Research study looking at 600 companies from 1980 to 1985 found that those businesses which chose to maintain or raise their level of advertising expenditures during the 1981 and 1982 revession had significantly higher sales after the economy recovered. Specifically, companies that advertised aggressively during the recession had sales 256% higher than those that did not continue to advertise.

 

The statement can be generalized. Advertising is investment in market development. If you can invest in recessions, you reap the reward in the recovery and boom phases. It applies all other areas of your supply chain. If you can invest and develop your supply chain during recessions you will be able to earn better during recoveries.

 

But what is needed is that you have the resources to invest. The recession should not have hurt you badly.

 

Proper investment analysis is still required. Extra attention to risk management from the liquidity perspective becomes the important prerequisite. The firm must be able to ride the forecasted recession period and for this purpose adequate liquidity needs to be maintained. Additional resources should not be hoarded but must be invested appropriately during recessions.

 

Indian Situation

 

Indians can read an article published in Brand Equity (Economic Times) dated 3.12.2008  (http://economictimes.indiatimes.com/Brand_Equity_/A_slowdown_neednt_be_such_a_bad_thing/articleshow/3786555.cms)

that gives opinion of David High, CEO Brand Finance. He feels Indian companies have money and hence they can invest in brand building or market  development investment now. Indian companies can buy brands. They are available at lower prices. The key is that Indian companies have money when foreign companies have got into liquidity and solvency problems. Right to invest after proper analysis and planning. Tatas and Birlas have bought brands and companies and are now struggling to manage their acquisitions. But let us hope they will manage the challenge successfully with less trouble in their parent companies.