Recessions Bring Opportunity – The Risk Lies In How You React To It
Recessions Bring Opportunity
Value investors love recessions because they intelligently recognize that recessions bring opportunity. Many investors see recessions as great risks, but the true risk lies in how you react during the recession not the recession itself. The first rule of investing is to buy low in order to sell high. Recessions bring with them not just low stock prices, but more to the point, low valuations. This means that recessions bring bargains where you can buy great companies at less than their true worth value.
In this video Mr. Valuation provides historical evidence of the veracity of the above statements. Recessions tend to be relatively short-lived in modern times whereas the subsequent bull markets tend to be longer lived. Every bear market ends with a bull market and vice versa. We have been in one of the longest bull markets in history and investors have become spoiled, even complacent. As a value investor I have enjoyed the price gains just like everybody else. However, recognizing the significant overvaluation that was occurring I was literally living the maxim: “Wall Street climbs a wall of worry.” I often say that as a portfolio manager I live in money manager hell. When clients and investors are giddy, I am scared and depressed; whereas when clients are scared and depressed is when I become giddy.
Finally, in the video I will illustrate how FAST Graphs fundamentals analyzer software tool helps you recognize the difference between the true worth value of the business and the current market valuation. In the long run, earnings determine market price (EDMP). In other words, long-term investment success is a result of long-term business success. In contrast, there is an evil twin sister EDMP that states emotions determine market price in the short run. These emotional responses create disconnects from true worth value. Stated more directly, this allows you to recognize the risk of overvaluation when in excess as well as the opportunity of undervaluation when it is manifest. Then and only then can investors make prudent, intelligent, and ultimately long-term profitable investment decisions. Think long-term and focus on business value over market value.