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Warren Buffett's 5 eternal rules to weather a recession: A guide for investors in 2023

Recent data on the global economy, inflation and impending recession supports Warren Buffett's eternal words of investing wisdom.

April 01, 2023 / 04:30 PM IST

Warren Buffett, one of the most successful investors in the world, has over the years provided valuable insights for investors on how to weather a recession. As the market remains volatile and unpredictable, it is worth taking note of some of his eternal words of wisdom.

Here are 5 key rules for investors to always take into consideration while investing:

1.      Invest in Productive Assets: Buffett recommends investing in productive assets such as real estate, businesses that produce goods or services, and farmland. These assets generate cash flow, which can be reinvested or used for other purposes such as paying dividends. Investing in productive assets generates a reliable source of income that is not dependent on market performance. "Productive assets such as farms, real estate and, yes, business ownership produce wealth lots of it. Most owners of such properties will be rewarded. All that's required is the passage of time, an inner calm, ample diversification and a minimization of transactions and fees," he discussed in the 2021 Annual General Meeting (AGM) of Berkshire Hathaway shareholders.

2.      Focus on Long-Term Investments: Buffett advises investors to focus on the long-term and avoid short-term thinking. He believes that the stock market will continue to go up over time, and investors who hold onto their investments for the long haul will be rewarded. To elaborate on the same point, he has even stated that one should "only buy something that you'd be perfectly happy to hold if the market shut down for 10 years."

3.      Buffett is no fan of diversification: He feels that diversification makes very little sense and is a protection against ignorance. "Diversification is a protection against ignorance," he once said. "It makes very little sense for those who know what they're doing." Hence, he advises investors to read a lot and build knowledge before taking investing decisions.

4.      Avoid Overreacting to Market Volatility: Buffett warns against overreacting to market volatility. In times of market turmoil like the present, it is easy to get caught up in the hype and make rash decisions. However, investors should remain calm and focused on their long-term goals. To further explain the above point, Buffett has stated in a press meeting in 1987 that "Erratic markets are ideal for any investor — small or large — so long as he sticks to his investment knitting. Volatility caused by money managers who speculate irrationally with huge sums will offer the true investor more chances to make intelligent investment moves. He can be hurt by such volatility only if he is forced, by either financial or psychological pressures, to sell at untoward times."

5.      Invest in Companies with Strong Fundamentals: Buffett advises investors to look for companies with solid fundamentals such as a strong balance sheet, reliable income stream, and good management team. Companies with these qualities are more likely to weather a recession and emerge stronger on the other side. To further extrapolate the above point Buffett has stated that, "If a business does well, the stock eventually follows." This simply means that one should focus on the underlying strength of a business and its fundamentals. If the two are sound and sustainable only then investors should look to invest in the same.

Recent data on the global economy, inflation and impending recession supports Buffett's eternal words of investing wisdom. According to a report by Fidelity Investments, investors who remained invested in the stock market during the COVID-19 pandemic have seen reasonable returns.

The S&P 500 has given a return of 34.39 percent in the last three years and a return of 52.47 percent in the last five years. This highlights the value of focusing on the long-term and avoiding overreacting to market volatility.

In conclusion, Warren Buffett's advice remains relevant in 2023. By investing in productive assets, focusing on the long-term, diversifying your portfolio, avoiding overreacting to market volatility, and investing in companies with strong fundamentals, investors can position themselves for success in any economic climate.

Shivam Shukla