How to invest using critical thinking
Don't be afraid of recession
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"Question Everything"
That's what my Dad asked me to do when I was little.
He taught me how to develop critical thinking.
I challenged him on just about anything.
Some really dumb ones that's so obvious that made no sense to even have a debate.
Few times, I explored ideas and thoughts my dad had never even considered before.
To a professor with a PhD in Mechanical Engineering, I can sense at times he was really proud of me as his star student.
Now that he is older, I think in a way, he may have regretted the way he raised me:
When I debate with him on silly things that really don't require any debate.
Let's just say, at one point in my adult life, as a family we had a heated debate about whether Pluto should be a planet or not, at a restaurant where people were wondering, what is wrong with this family.
I do have my Dad to thank for helping me become a skilled investor with critical thinking skill.
Today, I'd like to share an example of how do use critical thinking in helping you make better investment decisions.
More than 5 million student loan borrowers are in default
That's the news headline on PBS yesterday:
Let's unpack how this piece of news can affect investing, our wallet and our retirement.
First, let's take a look at the data.
"More than 5 million student loan borrowers are in default"
What does that really mean?
5 million is a meaningless number.
It's just a number.
It's only meaningful when we have a better context on what it represents.
After doing some digging, I found this press release from the US Department of Education:
In the article, it highlighted the following:
* Today, 42.7 million borrowers owe more than $1.6 trillion in student debt.
* More than 5 million borrowers have not made a monthly payment in over 360 days and sit in default—many for more than 7 years—and 4 million borrowers are in late-stage delinquency (91-180 days). As a result, there could be almost 10 million borrowers in default in a few months. When this happens, almost 25 percent of the federal student loan portfolio will be in default.
* Only 38 percent of borrowers are in repayment and current on their student loans. Most of the remaining borrowers are either delinquent on their payments, in an interest-free forbearance, or in an interest-free deferment. A small percentage of borrowers are in a 6-month grace period or in-school.
Let’s look at this line by line.
We're going to come back to this 42.7 million number in a bit.
5 million student loan borrowers haven't made a monthly payment in over 1 year.
Translation: They are going to have a hard time paying it, if they are not paying it at all.
4 million borrowers are in late-stage delinquency (91-180 days)
Translation: There are 4 more million people will be added to the 5 million count.
Leading to almost 10 million people not paying their student loans.
10 million out of 42.7 million is around 25% (as mentioned in the highlighted press release)
The next data point is what got my attention.
"Only 38 percent of borrowers are in repayment and current on their student loans"
That means, about 62% of borrowers are either behind or not paying their student loans at all!
Now, we take 42.7 million total student loan borrowers and times that by 62% of borrowers who behind, we get:
42.7 million * 62% = 26.5 million people who are behind with their student loan payments.
Did you have a reaction to that number?
5 million is what was reported by the mass media
When in reality, 26.5 million people are behind.
What does that mean to the economy?
Continuing from the press release:
All borrowers in default will receive email communications from FSA over the next 2 weeks making them aware of these developments and urging them to contact the Default Resolution Group to make a monthly payment, enroll in an income-driven repayment plan, or sign up for loan rehabilitation. Later this summer, FSA will send required notices beginning administrative wage garnishment.
With 26.5 million people behind on their student loans AND the Federal Student Aid (FSA) office plans to initiate wage garnishment late summer, it means many things are about to happen:
1. For those borrowers who are living within their means, they can adjust their lifestyle by cutting back on spending to pay the monthly student loan
2. For those borrowers who are overspending but have enough income to cover essential living expenses, they can also cut back on their lifestyle
3. For those borrowers who are already stretched due to inflation and their income not keeping up with the increase of living expenses, they have to trade down on their living standards.
4. That means, in a good case for people in situation #1 or 2, those 26.5 million people may cut back on travel, entertainment, eating out, food deliveries, etc.
5. For more dire situation as #3, they will most likely have to relocate and move to a cheaper location, trade in their vehicle for a cheaper car, etc.
What does that mean for investors?
Expect discretionary spending to drop significantly.
26.5 million is a lot of people.
If all of a sudden they all stop spending money, that means many of the businesses that rely on those spenders will now see decrease in revenue.
Again, 26.5 million is a big number.
For real estate investors, expect rent to drop as people trade down on their living standards.
People will move in with families, sharing a house with multiple generations, looking for ways to make ends meet with a portion of their wage being garnished.
The businesses that are affected will also start to cut back on their staff, as less income resulting in less needs for keeping the same amount of workers employed.
Expect more people getting laid off, hours getting cut.
That in turn, further reduces spending as these employees also have to cut back because they are now earning less.
That is how a recession get started.
You are smart to understand this
What I wanted to illustrate is how critical thinking works in investing.
Never take a news headline at face value.
There's usually a lot more to the story.
Follow the line of thinking, one can make an educated guess that we are heading towards recession.
Regardless what any politician will tell you otherwise.
Investing doesn't have to be hard
The key is to ignore the noise and what's been talked about on the mass media.
Because by the time something made it onto the mass media, the popular news channels people watch, in the world of investing, it's called "too late".
Take a piece of data, and question the data.
Keep asking questions until you find out multiple ways to look at the same data.
This opens up another narrative one may have not considered before.
This paints a new picture of what others may have not seen.
This tells a different story that many may have missed.
My friend, that new story, new picture, or new narrative, could make you a very successful investor.
Don't be afraid of recession
Understand that recession is part of a normal economic cycle.
We're long overdue for a recession.
The key is to pivot investment strategies when the economy turns.
Don't get caught up when the wave comes.
Prepare yourself ahead of time, and know that most wealth is made from a recession.
What do you think?
Do you think a recession is coming?
What are you doing to prepare?
I’d love to hear.
Reply and let us know your thoughts.
If you like my work, I invite you to share it with others.
Eric Chang
Calgary, Alberta
April 22, 2025
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