It’s widely predicted that the US will face a recession in 2023. And the shocks will be felt worldwide.
In today’s issue, I will share 6 investing lessons that you must keep in mind if and when such a scenario unfolds.
These lessons will ensure that your portfolio stays healthy and your mind stays calm amidst all the upcoming turmoil.
Let’s dive in:
1: Accept that things will be rough
First things first, accept that things won’t be as rosy as they were in the last few years. Interest rates have been hiked and liquidity is low, which means stock prices aren’t going to zoom up as they did earlier.
Companies may miss their targets due to the recession and this may lead to a drop in stock prices as well.
Simply accept that all this can happen, and will happen. Accept that things are cyclical. Once you accept the cyclical nature of markets, you will be well-equipped to handle the volatility.
As Howard Marks says:
“Nothing goes in one direction forever… Cycles always prevail eventually.”
2: Don’t ignore the valuation
I remember a lot of Finfluencers on Twitter claimed that valuation doesn’t matter as long as companies are growing fast. This was back in the bull market of 2020-21.
However, the scenario has changed. The recession will impact the cash flows of a lot of companies. Also, interest rates are critical to valuing companies. As the interest rates increase, the valuations for these companies will come down as well.
This is why Buy At Any Price (BAAP), which was in vogue in 2020-21, won’t fare well going forward.
In 2023, pay extra attention to the price you pay and make sure there’s an adequate margin of safety.
3: Focus on resilience
When a recession strikes, companies and individuals will cut their spending. This behavior impacts all businesses in varying degrees – whether they are B2B or B2C.
Companies with no moats and fragile balance sheets will be the first to fall. No matter how fast they were growing earlier.
By adding companies with wide durable moats and good balance sheets, you will strengthen your portfolio and make it resilient.
This may also be the time when you find quality companies at a discount.
4: Have realistic expectations for returns
Unlike 2020-21 when stocks would pop +20% in a single week or even a day, 2023 may be very different.
Low liquidity means that inflows into stocks may be muted. Which will make stock buying less prolific compared to the last few years.
Instead, focus on the long-term. I always see investing as a long-term game and when you stop focusing on the next few months or years, your expectations will be much more realistic.
5: Bottom-up stock picking
Bottom-up stock picking is all about evaluating the fundamentals of a company (revenues, cash-flows, margins, etc.) instead of the industry or market in general.
Every quarter brings a new trend along with it. Pharma, Crypto, Remote Work etc. all were major trends in 2020-21, and today they are all muted.
So learn to ignore the trends and focus on the fundamentals of the companies when picking stocks.
Because in the long run, the stock price of a company follows its earnings growth.
6: Do your own due diligence
When the market is in turmoil, different people will have different opinions about a single company. But do not invest in a company unless you have evaluated the company on your own.
Investing in a company on the basis of someone’s recommendation is not wise – no matter how experienced that person is.
You can copy their investing decisions but when markets are volatile, you can’t copy their conviction. I’m speaking from personal experience.
When you do your own due diligence, it becomes easier to withstand volatility.