How to Invest Like Warren Buffett During a Recession

Between 2020 and 2022, US stocks soared towards the moon. This year, however, they were released back to Earth.

The S&P 500 (INX) is down about 18% year-to-date, inflation rates are at 40-year highs, geopolitical chaos is rife and a recession is looming. The easy money environment many investors have grown accustomed to over the past 13 years is in the rearview mirror.

The S&P 500 growth index, which tracks stocks with the best three-year growth in revenue and earnings per share, dropped nearly 15% last year. The S&P 500 Value Index, which tracks top-rated stocks, dropped 4.8% over the same period.

“Wall Street makes money, one way or another, by picking up the crumbs that fall from the table of capitalism,” Warren Buffett warned investors at his annual Berkshire Hathaway shareholder meeting in April. “They make a lot more money when people are betting than when they are investing.”

The difference between betting and investing, says the Oracle of Omaha, lies in understanding a company’s fundamentals.

Technical analysis is mainly based on stock price and volume. Marketers are not trying to predict a company’s future. They don’t analyze the underlying business or the economy, but use charts and identify patterns to predict where a stock is going.

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

The casino is open

About 15% of all current US stock market investors say they started investing in 2020, according to a Schwab survey — and the majority who opened their first non-retirement investment account that year were under 45. and lower rents than the most experienced investors.

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

These stock rallies were largely based on technical issues – a coordinated short-term squeeze – rather than whether the companies were viable in the long term. That indiscriminate buying helped turn Wall Street into a “game room,” Buffett said at his company’s April meeting.

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

In the long run, stocks tend to outperform inflation and bounce back from recessions by a wide margin, but it’s a marathon — not a sprint. Buffett is 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 hunker down and get through the tough times, fundamental investing is the way to go, analysts say.

Trust in 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 term, but it’s always rational in the long term,” said Check.

Bubbles grow and burst, but if you consider how a company will do over the next decade and stick with it, “you will eventually get rewarded,” he said.

“The stock market is the only store where, when things go on sale, everyone runs out. You don’t want to be one of those people,” added Shawn Cruz, chief trading strategist at TD Ameritrade.

Companies with solid balance sheets, healthy cash balances and growing revenues are likely to be currently priced at discounted prices, he said. “So if you have a long-term focus and some specific names you are looking for, this is a good time to pick up some quality stocks for your portfolio.”

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

do your homework

The good news for the laziest (or busiest) investors is that many experts have already done the research for you and, for a fee, you can gain access to it. 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 by reading about a potential company. See who’s running the business, what they’re promoting 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 company from scratch if given the chance, said Check.

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

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

Finally, stay up to date. Your investment in a company doesn’t end when a deal is complete. The economy evolves and so does your portfolio.

Most importantly, don’t be afraid to stop actively investing. “In my opinion, for most people, the best thing to do is own the S&P 500 index fund,” Buffett said at his 2020 shareholder meeting.

“There are huge amounts of money that people pay for advice they don’t really need.”