Everybody seems to be talking up stocks and mutual funds these days. And why not! After all, the Indian market has proven to be the most resilient and fastest growing stock market among the big economies. However, World Bank, in its latest press release, has thrown a wet blanket on the optimistic outlook of Indian investors. It says 2023 is likely to witness a massive global recession, which will also adversely impact the Indian economy, reports Economic Times.
Fear and Greed
It is often seen that investors – especially those who are just stepping into the markets – chop and change their strategy during a recession. In fact, some are so affected by the ‘bad’ news that they decide not to take the plunge at all.
Thus, when fear takes over, the general tendency is to exit the potentially volatile market ASAP.
But the hallmark of smart investors is their ability to ride market trends – upward or downward – and use them to maximum benefit.
In the words of the Godfather of investments – Warren Buffett – one should always “be fearful when others are greedy and greedy when others are fearful”.
As per the Buffett school of thought, a recessionary environment is the ideal time to start investing, because everybody has a tendency to sell off and premium stocks are available on heavy discounts.
The strategy of buying when the economy is on tenterhooks is based on two main reasons.
Firstly, the markets have always gone up over the long term. So, if your investment horizon is between 5 to 15 years, there is only one direction in which your corpus is heading – up, up and away, just like Superman!
Secondly, a recessionary sentiment ensures that even bluechip equities are traded at relatively nominal rates, making them easily procurable for small-time retail investors.
The end result – you can buy low due to the imminent fear in the market, and sell high after the market corrects itself, which it almost always does.
Analysing World Bank’s statement
World Bank has stated three reasons behind the precipitating economic slowdown -– central bank interest rate hikes, high inflation, and the Russia-Ukraine conflict.
But most experts feel that the global markets – and especially the Indian market – have already reacted to these developments. For example, between last February and June, the heavy correction seen in Indian stock prices was due to these very factors.
World Bank has also said that if even one of these factors escalates further, the global economy would officially be in a recession.
The right strategy
In this climate of doom and gloom, what should be the right investment strategy?
One should always remember that all successful investments have a crucial element – that of ‘timing the market’.
The essence of timing the market is buying low and selling high.
Historically, we have seen that when the money supply in a market is high, stock prices witness an unprecedented rise. A case in point – when governments pumped trillions of dollars into their economies via post-COVID stimulus packages, the markets rebounded to new highs.
Today, due to rampant inflation, the central banks of all countries have hiked lending rates. As a result, money supply to the markets has been slashed and share prices are in a stasis.
And apparently, this is not the end of it.
The Big Short
The legendary US hedge fund manager Michael Burry, who predicted the 2008 subprime mortgage crisis – and on whom the eminently watchable Hollywood movie, ‘The Big Short’ is based – tweeted this at the start of 2023.
“Inflation peaked. But it is not the last peak of this cycle. We are likely to see CPI lower, possibly negative in 2H 2023, and the US in recession by any definition. Fed will cut and government will stimulate. And we will have another inflation spike. It’s not hard.”
What Burry means to say is that inflation will soon hit its peak and stock prices their bottom, making the second half of 2023 the perfect entry point.
But where to invest?
Timing the market is one thing, finding suitable investment instruments (or the right stocks) is quite another.
So, what should be our areas of focus as investors given the current scenario?
The rule of thumb is – whatever the market situation, always invest in good businesses.
To refer to Warren Buffett again – while investing, one should not be too influenced by what’s happening externally. He advises that one should invest in Blue-Chip businesses with high value and let the historical upward trend of the markets do the rest.
“Rule number 1 is to never lose money,” Buffett has often said.
And if, due to a recessionary environment, you are able to pack your portfolio with Blue-Chip stocks at prices 20-30% off their all-time highs, then there can be no better start to your journey to wealth creation.
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Source: Economic Times