Signs that the US economy is headed into a recession are becoming more glaring.
Projections from the Bloomberg Economics model point to a 100% likelihood of recession in the next 12 months. The Conference Board predicts a 96% possibility of a recession.
Apart from this, financial markets have also been flashing recessionary signals. US yield curve is at its most inverted since 1981, as the gulf between short- and long-term US borrowing costs continues to widen.
Since recessions are characterized by anxiety, investors should attempt to buy shares at steep discounts. With that in mind, it's safe to assume that many Americans are considering what they can do to prepare for a recession.
A recession, according to famed investor Warren Buffett, is one of the ideal periods to hunt for investment opportunities. "Bad news is an investor's greatest buddy," he stated in 2008. It enables you to purchase a discounted portion of America's future.
However, Buffett also acknowledges that many people don’t have the time or the experience to identify the best investment opportunities available. Given the pervasive fear and anxiety that comes with recessions, many investors miss out on opportunities to locking in quality stocks at cheap prices.
If you are one of those wondering how to invest during a recession, here are some tips you can glean from Buffett's recession strategy.
At the 2022 Berkshire Hathaway annual shareholders meeting, Buffett said,
“The best thing you can do is to be exceptionally good at something. People are going to give you some of what they produce in exchange for what you deliver.”
What Buffett implies by this statement is that the best form of investment is investing in yourself. Regardless of what the economy has to offer, people will still seek you out for your skills and what value you can offer.
As such, unlike money, skills are recession-proof.
“The best investment by far is anything that develops yourself, and it’s not taxed at all,” says Buffett.
Lesson: The best investment you can make is investing in yourself. The returns are immeasurable and sometimes it costs nothing to develop yourself. The irony is that the more you share your knowledge and skills, the more you improve and become more knowledgeable.
It is always worth investing in yourself no matter the economic situation.
In his 2016 annual shareholders letter, Buffett suggested that dark clouds would fill the economic skies and they would briefly rain gold.
“During such scary periods, you should never forget two things: First, widespread fear is your friend as an investor, because it serves up bargain purchases. Second, personal fear is your enemy. It will also be unwarranted.”
Lesson: There is always an opportunity in every situation. It is left for you to discover them.
He stated in the same letter from 2016 that,
"Investors who avoid excessive and needless fees and merely sit for a lengthy period of time with a portfolio of large, conservatively funded American corporations would almost likely perform well."
Buffett said in an editorial post for the New York Times that,
"Businesses will undoubtedly have earnings snags, as they always have. However, the majority of large corporations will break current profit records in five, ten, and twenty years. It's difficult to predict whether, when, or how long a recession will endure without a crystal ball, but if history is any guide, the economy always bounces back."
Lesson: Having a long term view smoothes out short-term fears and anxiety of the economy and financial markets. It puts things in proper perspective for an investor looking for opportunities.
During the 2020 shareholders meeting at the height of the pandemic, Buffett stated,
“For most people, the best thing to do is owning the S&P 500 index fund. There are huge amounts of money people pay for advice they really don’t need. If you bet on America and sustain that position for decades, you’d do far better than buying treasury securities.”
Since 1957, the S&P 500 has a returned historic annualized average return of about 11.88%.
Lesson: Keep it simple and do not try to complicate things they way financial experts do. Sometimes, the boring assets are those that have the lowest risk and produce the most significant returns over the long term. Do not try to anticipate the market of invest in the next big thing.
In his 2021 annual shareholders letter. Buffett advised investing in what he calls productive assets.
“Productive assets such as farms, real estate and business ownership produce wealth — lots of it. Most owners of such properties will be rewarded.”
Lesson: There are always trendy investments that come up over time. These investments or assets seem to be the next big thing, however they are unable to withstand the test of time. Assets that are productive are those that will continue to produce value, not those that have 'expected value'.
Buffett has always advised patience, which is a necessary ingredient for long term investing.
"An investor should practice patience among other things. “All that’s required is the passage of time, an inner calm, ample diversification and a minimization of transactions and fees,” says Buffett in his 2021 letter to shareholders.
Lesson: Successful investing is a long game, not a short term venture. Staying in the game requires a lot of patience and confidence to get through the cycles of ups and downs.
Buffett stated that the most important lesson he took away from the pandemic in a 2021 interview with CNBC was just how unprepared we are for emergencies that are certain to occur.
“I learned that people don’t know as much as they think they know. But the biggest thing you learn is that the pandemic was bound to occur, and this isn’t the worst one that’s imaginable at all,” Buffett said. “Society has a terrible time preparing for things that are remote but are possible and will occur sooner or later.”
Lesson: As investors, learning how to anticipate the unexpected prepares you adequately. This means while others are anxious or fearful, you will be able to identify opportunities hidden in plain sight amidst the confusion.
Little wonder that during economic downturns is when the ultra wealthy increase their net worth, while those that are average lose it.
The economy, just like life in general is cyclical. This suggest that it operates in cycles. After the boost due to stimulus pent-up during 2020 and 2021, it was expected that there would be a slowing down as inflation was rising at neck-breaking speed.
During bad times, Warren Buffett encourages investors to have confidence. In 2010 in response to the National Bureau of Economic Research announcing that the recession ended in June 2009 Buffett said to investors,
“We’re still in a recession. We’re not gonna be out of it for a while but we will get out.”
Nothing is permanent, so even when it feels like the economy will continue to shrink, remember that there’s a light at the end of the tunnel.
Lesson: Though the economic downturn is expected to continue for sometime, it is not the end of the world, as a period of abundance will surface again. As such, those that would be best prepared for the booming economy are those who have started taking positions and investing right now.
Economic indicators are screaming recession.
We can't say for sure if it will really occur. But it's good to prepare for one just in case. And that could mean following Buffett's advice and making yourself the most valuable employee you have the potential to be.
Warren Buffett has offered sage advice over his long investing career. Given his success, it’s understandable why you should look to him for investment advice in the face of an oncoming recession.
However, the good news for everyday people is that his advice is relatively simple: keep your investments diversified, and don’t panic.
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