Last week, I wrote about 6 investing lessons one must remember to survive a recession.
The more I thought about it, the more I realized there are some more investing lessons that can come in handy during a recession.
So without much ado, here are 6 more investing lessons for you:
1: Don’t make it stressful
In a recession, the markets test two things:
- The resilience of the companies you’ve invested in
- Your own emotional stability
I covered the first part in my earlier post, so we will focus on the 2nd point.
Volatile markets will test your patience more than anything. This is where control over your emotions will come in handy.
Read more about behavioural investing and the common psychological biases one faces during his/her investing journey.
The best place to start would be Charlie Munger’s A Lesson on Elementary Worldly Wisdom As It Relates to Investment Management & Business.
You can read it for free on Farnam Street.
Note: It’s a long read.
2: Think like an owner
As an investor, one should always think like the owner of the company. Especially during volatile times.
Ask yourself, would Jeff Bezos sell all his stake in Amazon during a recession? No!
Think along the same lines. When you see yourself as the owner of a company, you will make more rational decisions – which includes picking the right ones in the first place.
3: Disconnect the business from the stock
As investors, we should disconnect the business from the stock.
While we may buy a stock or a fraction of a stock in the market, what we are investing in is an actual company. A company that makes money, employs people and contributes to the GDP of the country.
Benjamin Graham, the father of value investing, has famously said:
“In the short run, the market is a voting machine but in the long run, it is a weighing machine.”
The “weight” in this context is the performance of the business, which includes its revenues, profits, margins, cash flows etc. So when you focus on these metrics, it will give you a better idea of how the company is facing any headwinds during a recession.
The stock price is just a label.
4: Stay invested
Investing is not for the faint-hearted. The volatile markets can test your patience and even make you scared.
Unfortunately, a lot of retail investors will bail out and wait for the bull market to return. This will do nothing but hamper the compounding of their wealth.
As Charlie Munger says:
“The first rule of compounding: Never interrupt it unnecessarily.”
In fact, this is the time when great stocks can be found at good prices.
5: Focus on avoiding risk
If you have capital at hand during a recession, you may be tempted to make purchases. And why not?
Stocks floating at low prices are definitely attractive.
But you know what they say about a stock that is down 95%? It’s the stock that went down by 90%, and then again by 50%.
So avoid making decisions by looking at the price only. Implement second-level thinking and figure out the robustness of the company.
When you focus on avoiding risk, profit will take care of itself.
6: Ignore the noise of traders and “experts”
You may have already seen the cacophony of news anchors and influencers during the 2020-21 bull market and the subsequent fall in 2022.
As an investor, you need to tune out these folks. It’s their job to talk about stock prices and volatility.
Their job is not to share timeless investing lessons. If they did that, they would have nothing to talk about the whole day.
Focus on your own investing philosophy and if you want to consume any investing-related content, you’re better off reading books or watching interviews of investors who have a similar investing philosophy as yours.
With these 6 lessons, I hope you are better equipped to withstand any upcoming recessions.
Although I sincerely hope the fears of a recession in 2023 turn out to be false.