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The ASX tide is going out, are you still clothed?

As we all would be painfully aware of right now, the ASX is in the throes of a pretty nasty bear market. Despite the S&P/ASX 200 Index (ASX: XJO) enjoying a 2.32% gain today (at the time of writing), the ASX 200 is still down around 27% from its February highs as we speak.

As we journey through one of the most trying economic times the country has ever faced, I’m reminded of a famous Warren Buffett quote that seems apt right now:

“Only when the tide goes out do you discover who’s been swimming naked.”

Well, the tide is going out people, and the scenery at this metaphorical beach is about to get a whole lot uglier.

What’s more, I think this is a phrase that cuts both ways. Yes, there will be companies that seemed like ASX high-flyers once upon a time that will turn out to be nude swimmers. But this same adage also applies to investors.

They say that more millionaires are minted in recessions than during any other time. But unfortunately, far more people go broke than become millionaires when the economic times get tough.

Over the last few years, it was fairly easy to make good money in the share market. Almost all ASX companies were buoyed by falling interest rates and a market that seemed to be consistently rising.

Times like this are great for everyone but can also give investors false confidence in their own abilities to pick stocks and make ‘easy’ money.

It’s brutal, but it’s also times like we’re in now when investors, just like companies, get exposed by the receding tide.

How to invest in shallow waters

Now, just to be clear, I’m not suggesting that ‘bad’ investors are defined by how much their portfolio drops in bear markets like the one we’re in. During bear markets, the market often acts irrationally and sells-off top-notch companies for prices that don’t make sense. These are the stocks that usually recover the fastest once the panic subsides.

No, investors get exposed by the receding waters when their ‘growth’ stocks are exposed by having too much debt, or else when they join the ‘crowd’ in selling off their stocks just because times get tough.

Warren Buffett himself is usually buying heavily during bear markets. Remember those top-notch companies being irrationally sold off? Well, every transaction has a buyer and a seller, and Buffett is usually the buyer. And the best investors do well by following in Buffett’s footsteps.

Remember, in recessions and bear markets, millionaires are minted and swimmers are caught short. Which one would you rather be?

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Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.