How to invest like Warren Buffett in a recession

The S&P500 (INX)is down about 18% since the start of the year, inflation rates are at their highest level in 40 years, geopolitical chaos abounds and a recession is looming. The easy money environment that many investors have grown accustomed to over the past 13 years is in the rearview mirror.
Risky stocks, SPAC and NFT bets have dried up, giving value stocks, with more stable short-term cash flows, the edge in today’s fear-driven market.
The S&P 500 Growth Index, which tracks the stocks with the best three-year growth in revenue and earnings per share, has fallen nearly 15% in the past year. The S&P 500 Value Index, which tracks the highest valued stocks, fell just 4.8% over the same period.
“Wall Street makes money, one way or another, by picking up the crumbs that fall off the table of capitalism,” Warren Buffett warned at his Berkshire Hathaway annual meeting of shareholders in April. “They don’t make money unless people do things, and they get a cut of it. They make a lot more money when people play than when they invest.”

According to the Oracle of Omaha, the difference between gambling and investing lies in understanding the fundamentals of a business.

Technical analysis is based largely on stock price and volume. Traders do not try to predict the future of a business. They don’t look at the underlying activity or the economy, but rather use charts and identify patterns to predict where a stock is going.

Fundamental analysis occurs when an investor assesses a company’s financial condition, performance, competition, and economics to determine its value, and then buys that stock when it trades at a discount.

The casino is open

About 15% of all current U.S. stock investors say they started investing in 2020, according to a Schwab survey — and the majority who opened their first non-retirement investing account that year were under 45 and had lower income than those with more experience. investors.

Buoyed by an influx of pandemic stimulus money, around 20 million new investors have poured their extra money into the US stock market over the past two years, using Reddit and other online communities to promote stories that have drives up the stock price of companies like GameStop 100 times. over a few months.

These stock market rallies were largely based on technical data – a coordinated short squeeze – and not long-term corporate viability. That blind buying helped turn Wall Street into a “gaming parlor,” Buffett said at his company’s April meeting.

Technical analysis is useful for short-term trading and for timing markets, while fundamental analysis is useful for long-term investments, which are less sensitive to the vagaries of the economy.

Over the long term, stocks tend to outperform inflation and recover broadly from declines, but it’s a marathon, not a sprint. Buffett has been known to say that his favorite stock holding period is forever.

Fundamental analysis doesn’t tell investors much about what will happen in the immediate future, but when it’s time to pull back and get through the tough times, fundamental investing is the way to go, according to the analysts.

Trust yourself

Investors aren’t very good at predicting the future, said Steven Check, who runs financial advisory firm Check Capital. They tend to overreact to immediate problems. “The market is irrational in the short run, but it’s always rational in the long run,” Check said. Bubbles grow and burst, but if you consider how a company will perform over the next decade and stick with it, “you will eventually be rewarded,” he said.

“The stock exchange is the only store where when things are on sale, everyone runs out. You don’t want to be one of those people,” added Shawn Cruz, chief strategist at TD Ameritrade. Companies with strong balance sheets, healthy cash balances and growing revenues are likely to be priced discounted right now, he said. “So if you have a long-term view and are looking for specific names, now is a good time to buy quality stocks for your portfolio.”

You don’t have to be a stock-picking guru, he added. Companies like Chase, Apple (AAPL), Amazon (AMZN) and Microsoft (MSFT) are still trading below their recent highs.

Homework

Good news for the lazy (um, busier) Investors Among Us: Many experts have already done the research for you, and for a small fee you can access it easily. But if you’re following Buffett’s rules, it’s important to do the work yourself and never invest in a business you don’t understand.

A good place to start is to read up on a potential business. Look at who runs the business, what they promote and how. Do you understand the product and do you think it has a place in the future economy? Ask yourself if you would rebuild this business from scratch if the change were made, Check said.

Next, take a look at the company’s financial statements, which are usually available on their websites. Assess your balance sheet. Do their profit and loss statements, cash flow statements, operating costs, income and expenses look healthy? Has net profit increased in recent years? Does the company’s indebtedness seem exorbitant to you?

You’ll also want to take a look at the wider economy and see how a company stacks up against its competitors. You want to invest in companies that stand out and have room for growth, especially in a crowded industry.

Finally, stay informed. Your investment in a business doesn’t end when a deal closes. The economy is changing and your portfolio should too.

Above all, don’t be afraid to stop actively investing. “In my opinion, for most people, the best thing to do is to own the S&P 500 index fund,” Buffett said at his 2020 shareholder meeting. people are paying for advice they really don’t need.”

About Joel Simmons

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