The probability of a recession here in the UK over the next year is increasing. After the latest Bank of England meeting, the committee flagged up the risk of negative GDP growth in the final quarter of this year. Recessions are typically negative for the stock market. However, there are some ideas to help me actually profit in the long term despite a potential slump. In terms of advice on this topic, I’m noting what legendary investor Warren Buffett has to say.
Buying for the long run
The first piece of advice from Warren Buffett that I like is when he said that “if you aren’t willing to own a stock for 10 years, don’t even think about owning it for 10 minutes”.
The point being made here is that I want to invest in stocks that I believe in for years to come. This is especially important when it comes to a recession period. During this time, I need to be happy with my stocks portfolio. I want to hold quality companies that won’t go bust during a tough six months or so in the economy.
For new stocks that I’m thinking of buying this summer, I want to ensure that these are financially stable and have resilient consumer demand. I’d prefer to steer clear of those with high debt levels. After all, during a recession, it will be difficult enough for some FTSE 100 stocks to stay profitable, without the added hassle of trying to repay debt.
Avoiding the urge to trade
The second point from Warren Buffett ties into the fact that I’m an investor, not a trader. Buffett has been quoted as saying that “calling someone who trades actively in the market an investor is like calling someone who repeatedly engages in one-night stands a romantic.”
Traders who buy and sell stocks over a period of a few days or even a few hours can be very successful. However, it’s a lot harder to make money in this scenario than my stance as an investor who buys stocks for months, years, even decades. During a recession, I think it’s even harder to make smart short-term calls. This is because volatility is high, along with a lot of uncertainty among investors.
Therefore, I’ll follow Warren Buffett’s advice and stick to my title as an investor. I’ll avoid buying and selling stocks on a daily basis, as I think my performance overall will be much better this way.
Imitating Warren Buffett in buying cheap shares
Market slumps that often accompany recessions offer me a great opportunity to buy quality stocks cheaply. Buffett commented that “opportunities come infrequently. When it rains gold, put out the bucket, not the thimble”
Due to excessive short-term fear, some stocks can see their share prices plummet below fair value. In this case, I want to deploy the spare cash that I have and snap these up. After all, history does show me that slumps don’t last forever and that the long-term trend of the stock market is higher. So if I’m able to put out my bucket as Warren Buffett suggests, I could benefit from this during the recovery.