Image source: The Motley Fool
The word recession throws up a lot of concerning thoughts for investors. From lower customer demand to the prospect of weaker profits, many businesses struggle in recessions. That might sound like it is therefore not a good time to start investing. But actually, I think there are some reasons why a recession can be a good time to begin dipping one’s toes into the stock market.
Buying a company not the market trend
When markets are booming, investors sometimes think their stock picking skill is better than it really is. They may credit their own insight for choosing winners, when in fact a hot stock market just illustrates the old saying that “a rising tide lifts all boats”.
By contrast, when a recession comes and many companies fall in price, some of those former stock market darlings (the shares, not the investors) suddenly do much less well. As famous investor and Berkshire Hathaway chairman Warren Buffett puts it, “only when the tide goes out do you discover who’s been swimming naked”.
As an investor, my focus is on finding shares in companies that have great long-term business prospects and sell for an attractive price. In a booming market, I think it is easier to mistake overall bullishness for a strong business. That can be a costly mistake.
Quality on sale
But some great companies also see their share prices fall dramatically in a recession. So, why do I still think it can be a good time to start investing?
If a company really is high quality and I continue to see its future prospects as bright, why should a share price fall in a recession concern me? If anything, as long as the long-term business prospects have not fundamentally changed, I simply see it as an opportunity to buy what I wanted before — but for less money.
That can improve my long-term returns. It is no accident that Buffett and many other successful investors have used recessions as an opportunity to shop for quality shares at depressed prices.
Start investing in shares not markets
I also reckon that if one waits for the perfect market condition to start investing, it might never happen. Today people are concerned about a recession. At some point again in future, the same people will be fretting about a bubble. That is how markets work — over time they cycle through both boom and bust.
Remember — I am not trying to buy the whole market. My focus is on building a diversified portfolio of individual shares I think are trading at an attractive price relative to their long-term business prospects. Such opportunities can exist regardless of what is happening in the overall market.
I think I can find such shares even in a recession. If anything, in fact, I reckon a market downturn could offer me even more opportunities to find such opportunities than in a bubble.
A recession can cause real problems even for some excellent businesses, so it is not necessarily the perfect time to start investing. But who knows when the perfect time is until it’s too late? I definitely think that, with the right approach, a recession can be as good a moment as any to start buying shares.