The stock market has been incredibly volatile recently. The global economy has become increasingly unstable.
Could it be possible that we’ve reached the end of this current six-year-long bull market and are headed for another recession?
The five quotes below from some of the world’s greatest investors shed light onto the proper investing mindset to have during recessions.
Recessions and stock market declines are not new. They have happened since financial markets have existed.
Somehow, we only think about the "good times" – bull markets – when we invest. Rarely do investors consider the possibility that share prices could fall during recessions.
The investors who don’t understand that stock prices rise and fall will sell at the worst possible times. What matters is not how low a stock price gets at any one time.
What matters is that the underlying businesses of the stocks you own are likely to grow over the long run. This has been the course of history. Over long periods, the average total return of the S&P 500 is about 9% a year. Some businesses have done much better (and others, much worse).
The stock market is not efficient. That is because people are not completely rational – and none of us ever will be, try as we might.
As a species, we are prone to excitement and depression. This is reflected in stock market manias (like the late 1990s tech bubble) and massive selloffs (the 1987 collapse).
This doesn’t mean that the underlying businesses of the stocks we hold are fundamentally worth rapidly more or less. It means our perception of their value changes.
Market fluctuations create value opportunities. Buying during recessions (and holding for very long periods of time) is one of the ways Warren Buffett (Trades, Portfolio) has become so wealthy.
Keeping a cool head and purchasing high quality businesses when they go on sale is a tried and true strategy. It makes intuitive sense.
What does not make sense is selling your shares of a high quality business because people are paying less for them.
Imagine the same principle applied to selling your house. Say you bought your house for $300,000. Two weeks later, someone knocks on your door and offers to buy your house for $150,000. You would probably think to yourself, “That’s insane, I’m not going to sell this house at half-off…”
Somehow, people approach stocks during recessions differently than they would any other asset.
Recessions don’t last forever. Even the Great Depression ended eventually. Truly high quality businesses will outlast recessions. Some will even grow during recessions.
Buying these type of businesses when people think “this time is different” and “this is the end of the global economy” simply allows you to own fantastic businesses at unfair (to other people) prices.
This quote is more gruesome than it needs to be. But the point it makes is still valid. The time to buy is when other people panic. Hopefully, this does not involve the loss of human life (as Baron Rothschild suggests in his quote).
Warren Buffett (Trades, Portfolio) made the same point (and with no mention of blood) when he said:
“Be fearful when others are greedy and greedy when others are fearful.”
Final Thoughts
Investing during recessions can be scary, but it can also be very rewarding.
Do you think it’s likely that businesses like Coca-Cola (KO, Financial), Wal-Mart (WMT, Financial) and McDonald’s (MCD, Financial) are going to go away because the stock market is falling? I don’t think so either.
