There's a lot of talk in financial media and from analysts on Wall Street right now about the prospect of a global recession at some point in the next 12 months. Trying to predict what the future holds for the worldwide economy is virtually impossible, but that doesn't stop economists from trying.
This is a problem for investors. Do we believe these economists and follow their recommendations to position our portfolios effectively, or ignore them and hope for the best?
Warren Buffett (Trades, Portfolio) gave us some great advice on this topic. In 2008, talk of a recession dominated Wall Street, and investors wanted to know how to position themselves to protect their portfolios from the worst of the decline.
Buffett on recession positioning
At the 2008 Berkshire Hathaway (BRK.A, Financial) (BRK.B, Financial) annual meeting, a couple of shareholders asked the Oracle of Omaha what he was doing to protect Berkshire's interests from a shrinking economy, and if he had any views on the outlook for the equity market.
Responding to a question about his outlook for the stock market, Buffett replied by saying, "Charlie and I haven't the faintest idea where the stock market is going to go next week, next month, or next year."
He went on to add that the board of Berkshire Hathaway never discusses the direction of the stock market when they meet. "We are not in that business. We don't know how to be in that business," Buffett added.
Instead of trying to predict the future direction of stocks, Buffett said that he and his team view the market as "thousands and thousands of companies priced every day." He ignores "99.9%" of what he sees on a daily basis.
Focus on the business
Buffett never buys a stock just because he thinks that the stock is going to go up or down. Instead, he is looking for cheap companies. As he went on to explain in 2008, "when we buy a stock, we would be happy with that stock if they told us the market was going to close for a couple of years."
An alternative way to look at it is to consider the business of farming. As Buffett said:
"It's exactly the same way as if you were going to buy a farm a few miles here outside of Omaha. You would not get a price on it every day, and you wouldn't ask, you know, whether the yield was a little above expectation this year or down a little bit. You'd look at what the farm was going to produce over time. You'd look at expected yields. You'd look at expected prices, the taxes, the cost of fertilizer, and you would evaluate the intelligence of your purchase based on what the farm produced relative to your purchase price."
It's what the company produces in terms of yield that matters. If it is a good investment, the asset will produce a good return for many, many years.
As a result, you don't need to worry about the price of the asset, and you certainly don't need a market to price the asset daily.
So, that's Buffett's view on how to prepare for a recession. If you already own good businesses with bright prospects, there's no need to worry about what might happen over the next two or three years. The enterprise should take care of itself, even if the stock price drops substantially.
As Buffett summarized in 2008:
"Quotes would have nothing to do with it. That's exactly the way we look at stocks. We look at them as businesses. We make judgments about what the future of those businesses will be. And if we're right about — in those judgments, the stocks will take care of themselves."
Disclosure: The author owns shares of Berkshire Hathaway.
Read more here:
- Warren Buffett: Figuring out the Durability of a Business
- Warren Buffett Undervalued Stocks
- Warren Buffett Top Growth Companies
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