As a man who’s invested through many recessions, Warren Buffett knows a thing or two about what to do! He’s negotiated some of the largest market wobbles on record, from the aftermath of 9/11 to the global financial crisis of 2008. With growing concern about what could be around the corner for the stock market in 2023, here are some of the lessons I can imitate from the wise investor.
Turning pessimism into a positive
In his 2008 annual letter to shareholders, Buffett commented that “the disarray in markets gave us a tailwind in our purchases. When investing, pessimism is your friend, euphoria the enemy.” This was after the steep fall in the stock market that year.
Buffett was actually buying during this period. Why? The disarray and pessimism that existed carried good stocks below their long-term fair value. During recessions, some investors panic and sell everything, regardless of whether it’s a smart move or not. Some prefer to sit in cash and have that security.
If we do see a similar crash in the next year, I want to try and take advantage and buy as well. It’s hard because it goes against our emotive reaction (that of fear). But Buffett has shown that his way of doing things does indeed work.
Making sure to buy value
Another lesson I can learn from the great man is highlighted from the $5bn investment he made in Goldman Sachs in 2008. The bank was struggling and needed to raise money during the downturn. Other companies also needed support, but Buffett chose Goldman Sachs and turned down some other opportunities.
From this, it’s clear that not all cheap stocks during a recession are worthy of being bought. The US bank had a strong history of profitability and a track record that gave Buffett some confidence in investing. If another recession arrives soon, I need to focus on such quality companies as well. It could be the case that some new growth stocks are also having a tough time. But with only a few years’ worth of accounts, it’s probably best for me to stay away and focus on companies that have survived through decades of previous economic cycles.
Of course, past performance doesn’t guarantee future success. After all, Lehman Brothers was a well-established company, but it managed to go bust during a recession!
Warren Buffett’s use of cash
Finally, I note how Buffett currently has a large cash reserve. His investment company, Berkshire Hathaway, still has around $100bn in cash waiting to be deployed. This has reduced in recent quarters as the team has been investing, but there’s plenty of dry ammunition to be used.
I have nowhere near this kind of money, but it does highlight the importance of keeping a cash buffer. I’m sure Buffett is also aware of the chances of an upcoming recession. Yet the only way he can follow what he did in previous market falls is to have cash ready to invest at that time.
Therefore, on a much smaller scale, I’m trying to ensure that I have some spare money in the tin that I don’t want to use right now. Then if the opportunity presents itself, I can be ready to go.
