Learning Resources

Guide to Investing During a Recession

25 Jan 2022

Guide to Investing During a Recession | Pauline Teo | VI

Investing in stocks during a recession is risky. Some companies will tank, and it could cost you A LOT of money... or so they say.

Yes, it is true. There's no denying that there are risks when investing during a recession. BUT, if you are doing the right things, playing your cards right, the risks of investing during a recession are actually much lower than investing during peacetime or compared to investing in bullish times.

See also: Pandemic Investors: True Stories on COVID-19 and Investing

Sounds unbelievable? Well... it's true but more about that later.

First, let me debunk this big myth around why you shouldn't invest during a recession.

Why you should invest during a recession

If you Google "people who became rich during a recession," you'll see a list of people who'd made a fortune during the worst of times before, including billionaire investor Warren Buffett. In fact, it is even reported that the likes of Mark Zuckerberg, Jeff Bezos, and Bill Gates have even increased their wealth in the last 2 years during the pandemic.

"Of course!" you say. "They are already rich in the first place, and they have successful businesses to earn them money." To this I say: excuses... excuses...

Warren Buffett started investing when he was 11 and did paper routes as a child. Was he born a billionaire or was his family super-rich? NO.

What he did do was to start investing early, learn proper investing from his mentor, Benjamin Graham, and understand his stocks inside and out. That's the reason why he can still use money to grow even more money... up until now, in his 90s.

A lot of the richest people we see now were not from rich families. The only difference between them and people who are still whining is... they know where to find the money. They are well-read enough to detect opportunities, they are constantly thinking of ideas to grow, which makes them so resilient, they can even make big money during bad times.

What to do before a recession

Investing during the recession is half about what you do during and half about what you do before the recession.

Here are the 3 crucial things you must prepare during peacetime if you intend to take advantage of an upcoming recession (trust me, there will be a few in your lifetime):

1. Set your target companies

The stock market is filled with great companies with high potential. The problem is, during peacetime, especially when the market is bullish, the prices of these stocks tend to be overvalued (share price is way higher than their intrinsic value).

Therefore, before any recession happens, aim to do as much research as you can and find a list of great companies you intend to invest in.

This way, it is much easier to "strike" and go in when a recession hits than to scramble last minute attempting to find one. 

2. Set your target prices

Great companies do not come with low share prices, e.g., Apple, Facebook, and Alibaba.

Seeing as how popular their products/platforms are, it's only logical for their prices to be irrational at times. However, this all changes in a recession.

People are more fearful because the future seems bleak. A lot of people would actively dump their stocks and cause the stock prices to fall.

This is when your opportunity comes because highly likely, this would be the very first time the share price would be on par with its intrinsic value or maybe even lower.

Therefore, apart from preparing a list of companies you want to invest in, take that extra step to set a target price for each company on your list before a recession. It is best to aim for a price 50% lower than its intrinsic value.

3. Create your brokerage and trading accounts

To buy and trade stocks, you would need to have a brokerage account and trading account with the central depository in your country.

There is a wide range to choose from when it comes to brokerage firms and there's no "right one" either. Instead, go with the one you're most comfortable with. Once you get that started, the brokerage firm is likely to help you create a central depository account as well if you don't have one yet (or at least the brokerage firms in Singapore do).

Depending on the firm you choose or your status, some approval processes can take a while, so you can never go wrong by doing this as soon as you can during peacetime and start investing during a recession.

What NOT to do when investing during a recession

Investing during a recession | Pauline Teo | VI

You now have your list of stocks in hand along with their target prices and your accounts ready. And then, a recession happens. Do you jump straight in? YES. Will it all go smoothly? NO.

I've been saying for years that anyone can make money off the stock market if it weren't for one thing – emotions.

During a recession, the stock market becomes 10 times more chaotic and each speculation that comes in will sound wilder than the last. You may be the most prepared person in the world then, but after listening to the news and market noise, you're likely to do the opposite of what you intended.

So, when investing during a recession, bear in mind these two things that you MUST NOT do:

1. DON'T get affected by falling prices

If share prices continue to fall after you've bought them at your target price, do not panic sell.

You've done your research, you've determined a stock's intrinsic value and your target price. Stick with it. There's a reason why you've done all those homework before.

Buy more if you want to lower your buying average price, but do not panic sell. It is alarming to watch it fall continuously but when the market recovers, you will be rewarded many times more.

2. DON'T get affected by news and speculations

Stock market news is designed and worded specifically to stir emotions and make you doubt your decisions. So if you feel affected by the stock market news, turn it off.

Like I said, if you've done your homework and chosen great companies before, there is no reason to fear.

Instead, observe the companies/stocks you're invested in. Are they thriving in the recession? Are they surviving or innovating? If they are doing really well, business-wise, but their share price is dropping by the day, it just means people are panic dumping and there is no reason for you, as a shareholder to be concerned.

People have asked me this before: If given a choice, would I choose to invest during a recession or invest in peacetime?

Honestly, I would say the former. The reason is simple. During a recession, it is as if the great stocks are on sale. It is the Great Singapore Sale of the stock market. And by buying my shares at much lower prices, I will also be able to earn more when the share prices bounce back up again.

It's like buying a Chanel bag or a Ferrari at half the price and having the opportunity to re-sell them at full price or more down the road. Now, who wouldn't want that?

Join me for a more in-depth value investing in stocks discussion. Secure your FREE seat here.

~ Pauline Teo

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