Have you thought about investments for the coming recession? What? Isn’t the market going to surge forward when Trump makes a deal in the trade war with the Chinese? Hasn’t the market defied every critic for years and years? The answers are “possible” and “yes.” However, every bull market ends. And, the ones that last the longest and run the highest often have the worse fall. As the economy cycles, we will see a downturn sooner or later. The bond market is betting on soon and on a downturn that will last a long time with its inverted yield curve. And, we have written a lot about how the trade war with China is more about global economic power, military strength, and the desire of the Chinese Communist Party to retain power forever. Any short term deal is likely to be largely for the sake of politics and more likely to benefit the political interests of the Chinese leaders and Trump than the populations and investors of either nation. All of that having been said, a wise investor will give some thought to investments for the coming recession.
Investments for the Coming Recession
We start off with an article from The Motley Fool about stocks to buy during a market downturn. They suggest Berkshire Hathaway and CME Group. CME gets their nod because trading volume in futures and options always goes up during a bear market. This is not a bad idea for the short term. They pick Berkshire Hathaway because of Warren Buffett’s ability to find bargains in bear markets and then watch those investments recover and grow over the decades.
One of the many great things about Berkshire Hathaway (NYSE:BRK-A) (NYSE:BRK-B) is that it tends to create tremendous value for its shareholders during periods of market distress. The mega-conglomerate is led by Warren Buffett, one of the most successful investors of all time.
Buffett excels at identifying mispriced assets, such as businesses that have temporarily fallen out of favor with investors. During bull markets, these opportunities are few and far between, but during bear markets, these profit opportunities are abundant. This is when Buffett is at his best.
We recently wrote about Buffett’s growing cash hoard as a silent warning for investors about the scarcity of good investment opportunities in today’s markets. But the truth of the matter is that Berkshire Hathaway will not stay out of stocks forever. Their favorite time to buy is when prices are depressed due to panic selling while long term growth prospects are good.
What Are Your Investments for the Coming Recession?
You do not have to be Warren Buffet to use intrinsic stock value as a guide to investing as he does. And, you do not have to buy stock in his company to follow the same approach. When choosing your investments for the coming recession, you can follow his approach which includes the following:
- Only invest in companies whose businesses you understand
- Don’t be disappointed if you end up throwing out 95% of the stocks you investigate
- Identify stocks that will have good cash flow going forward
- Identify a price at which buying those stocks will be profitable for the long term
- Pay attention as the market panics and many good stocks see their prices slashed
- Accumulate a pile of cash and be ready to buy when the time is right
And, if you think that wise investing during the coming recession will make Berkshire Hathaway more valuable, you might consider including them in your list of possible purchases. CME Group sounds like a good idea for the short term if you buy the argument that The Motley Fool makes. Utilities are usually a good bet when the economy weakens, but you need to get in before the market falls and not afterward.
We wrote recently about Disney as buy and hold investment. They have a business that is likely to grow over the years and will be rather recession-proof. The problem, in that case, is that the Disney stock price might not fall far enough to make it a wise purchase in your list of investments for the coming recession.
The best approach is to start with businesses that you understand and develop a short list of ones that have great long term prospects and whose stock prices will probably take a hit during a recession. Then start putting cash aside and wait for the inevitable.