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Word “recession” sounds a bit scary. And investing during this is feels like scarier given whole media propagate fears and confusion. And advise you to tread caution. I just wonder when it’s come to investing when you should not tread caution?
What is a Recession?
Recession is a slowdown in economic activities for two consecutive quarters or more often caused by
a high-interest rate, which in turn reduces in real wages hence low liquidity in the economy a decline in consumer demand.
It also has to do with the long term and short term business cycles which very natural and repetitive in any economy or industry.
image courtesy: https://www.thecanadianencyclopedia.ca
Recession is the best time to invest
If you are a long term investor this is possibly the best time to go “Long” in the market. Warren Buffett describes this time as ” When it is raining gold you don’t walk around with thimble” what he meant is when you see the Whole market is in deep discount that’s time to load up the truck not to shy away in fear.
when fear grips the market even great companies takes dips and investor like Waren buffet when investing, take huge advantage of this kind of scenario. His Coca-Cola purchase in 1983 still generating him 64% annualized returns which is also increasing every year and recently Apple, all are a result of the same investing principle.
In short, He defines a successful method of investing is to “simply attempt to buy the fear and sell the greed” , And to do this you simply need to do the followings
Focus on Quality companies Only
With recession at hand, there all the more reason to look for quality companies which can withstand the event. Quality companies that are run by “Great Management”, have a good solid operating history and have “Business or Economic Moat” aka Competitive advantages.
Moats can be its Brand power, Franchise networks, low production cost, High switching costs, a virtual monopoly, etc.
Invest only on “what you Understand”
This is a no brainer well one should never ever invest in what he doesn’t understand. if you do, you are not investing, but simply gambling. The good news is you don’t have to understand every company out there. You should prepare your Own “Circle of competence” it resembles your wishlist which contains a list of the companies you understand especially their business moat and you want to buy.
So, if you don’t understand the technology industry then simply you don’t have to invest in that. likewise, if you can’t understand a company with a really complex business model or financials you can simply skip it off. Find companies that you understand.
Don’t forget the Value
when investing one should not get influenced by short term price fluctuations. you need to compute the fair value a company first. There are several popular valuation models such as the DCF method, Graham’s method or even Peter Lynch’s value used by people.you should never pay the market price rather you should buy the shares at a significant discount ideally 25% of course, more the better. This discount is what Ben Graham called the “Margin of Safety”. which is very important in case you make any mistakes in your research this margin of safety will save you.
The right time to dollar average
Once you bought a stock at discount and if the stock price goes even lower than, it actually time to cheer and buy more. It’s like when you are buying a piece of the company let say $100 and which you valued it at $150. And if the price goes further below let’s say $80, then, you should be happy and buy more because it’s an opportunity to buy even cheaper.
Invest in an index fund
If everything mentioned above is a little too much for you?
Don’t worry you can simply invest in an index fund. This is an easy way to invest and suitable for newbies or simply doesn’t have much time to do research & find bargains in the market. Well, it can’t beat equity investing for sure. But if you can Just examine the trends it will optimize your returns.
investing during a recession requires a serious amount of patience and mental discipline.it just takes time to recover reduced consumer demand and other things. So do not check your stock prices every day but maybe weekly. It is very easy to get influenced by daily stock volatility. You are investing for the long term you should ignore the daily noise of the market.
It is the best time to be in cash or it’s equivalent before a recession or slowdown hits the markets. So that once some of the great companies become great bargains you can actually buy a truckload of them. As warren buffet once said you just need to invest only 3-4 great companies in a lifetime to be rich. and the good part is you don’t have to do anything else. So, throw away your thimble and at least be ready your washtub in the next gold rain. Happy investing.