By Craig Erwin, Ph.D.
It’s been a tough year, with the war in Ukraine scrambling supply chains and driving the prices of gas and food skyward. Plummeting stock prices have resulted in a bear market and the global economy may be in recession. A million experts are throwing out different predictions on when inflation will be reined in, when stock prices will stop tumbling, and when the economy will turn around. Most predictions foretell doom and gloom.
Warren Buffett, one of the richest people in the world, got that way because he knows how and when to buy stocks. He knows that patterns repeat themselves and, at 91 years old, he has seen many recessions and bear markets. He knows that recessions and bear markets eventually end and he views stock sell-offs like this year’s as buying opportunities. He also knows that, although some stocks may never hit new highs again, most will, and stock indexes like the S&P 500 certainly will. Buffett doesn’t pretend to know when recessions or bear markets will end or when individual stocks or indexes will rebound. It doesn’t matter. What matters is buying stocks at good prices after they have been beaten up.
The stock market is often, although not always, forward looking. That means that the stock market may recover before the economy does. So, if the stock market is rebounding even though everything else seems terrible, it may be telling us that the economy will get better sometime in the next year. But Buffett doesn’t care. He just buys stocks when they are cheap, regardless of conditions.
Will stock prices fall much farther before they reverse course and recover? No one knows. Are stock prices more attractive now than they were early in the year? Yes.
Rick Rieder, chief investment officer of global fixed income and head of the global allocation team at BlackRock Inc. says, “I don’t recall the prices of good quality assets looking so attractive in years.” Buffet may well agree.
Although recessions and bear markets are no fun, they set the stage for recoveries. If you are wise enough to buy stocks when the economy stinks and stocks have been beaten up, you will probably be pleased by the big gains you get in the first year or two of the economic recovery. That’s what Buffett does. It’s worked pretty well for him.
Are you worried about the economy? Are you investing in stocks? If so, are you able to buy more now that prices are lower than earlier this year?
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