We don't know when the next recession will be. Nor does anyone. Even economists have a mighty hard time predicting what the economy will do next year, or even next month. But what we do know is that there will be another recession at some point. Booms and busts are an inevitable part of our capitalist system.
We also know that periods of rising interest rates often come before a recession. That's what happened in the global financial crisis of 2007-2008. And in the early-2000s recession before that.
Australia technically escaped these recessions, but the world didn't. And the Australian economy was far from healthy during these periods, escaping the official definition of two quarters of negative GDP growth in 2008 by a whisker.
But we digress. Interest rates have indeed been rising in 2022, and by one of the fastest trajectories in modern times. Here in Australia, our official cash rate was just 0.1% at the start of the year. Today, following the Reserve Bank of Australia (RBA)'s recent December hike, it's now at 3.1%.
So if these hikes do lead to a recession in 2023, what are ASX investors to do? Sell out of everything, move to cash and wait for the good times to return? Perhaps we should start selling now, just in case?
That would be a big, wealth-destroying mistake in my view. I'll be following the advice of the legendary investor Warren Buffett instead.
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Some Buffett wisdom for a recession
Perhaps Buffett's most famous quote is, "be greedy when others are fearful and be fearful when others are greedy". It's another way of saying 'buy low, sell high', which is the timeless advice everyone knows when it comes to the share market.
But this quote from Buffett's 2009 letter to shareholders of his company Berkshire Hathaway Inc (NYSE: BRK.A)(NYSE: BRK.B) was written in the aftermath of the global financial crisis. It directly addresses investing in recessions and is some of the best advice he has given on the topic:
Big opportunities come infrequently. When it's raining gold, reach for a bucket, not a thimble…
We've put a lot of money to work during the chaos of the last two years. It's been an ideal period for investors: A climate of fear is their best friend. Those who invest only when commentators are upbeat end up paying a heavy price for meaningless reassurance.
In the end, what counts in investing is what you pay for a business – through the purchase of a small piece of it in the stock market – and what that business earns in the succeeding decade or two.
So here is Buffett calling a recession "an ideal period for investors". That's the attitude I'll be taking into the next recession we have.
Here's a clip of Buffett, courtesy of CNBC, discussing this principle further:
When a recession hits (or is about to hit), investors are often overcome by fear of losing money. As such, many have a tendency to throw the baby out with the bath water and sell out of everything. Thus, most share prices, not just those businesses likely to be hardest hit in a recession, can fall dramatically.
One of Buffett's biggest investments is in Coca-Cola Co (NYSE: KO) shares.
Do people stop drinking Coke in a recession? No.
And yet, in the global financial crisis, the Coca-Cola stock price fell by more than a third. It did so again during the COVID crash of 2020.
Yet today, Coca-Cola shares aren't too far from an all-time high. It would have been a bargain in hindsight to load up on this company at either of these periods.
So try and remember Buffett's wisdom if there is a recession next year. If you are greedy when others are fearful and put out the bucket while it's raining gold, it may well be the best thing that's ever happened to your share portfolio.
