It’s very easy to fall victim to recency bias. That is, we get caught up in what’s happening right now: what we’re hearing from the talking heads on TV, news publications, and friends’ anecdotes among other sources. However, it’s often the investors with the most unemotional relation to what’s going on that not only survive during downturns, but amass fortunes. Legendary investors like Sir John Templeton, Warren Buffett, and Jack Bogle all built their fortunes during downturns. Companies like GE, Disney, IBM, FedEx, and Microsoft were all founded during recessions. How is this even possible?
The individuals and companies mentioned all had the understanding that recessions (i.e. a period of extreme pessimism) are a feature of capitalism, not a bug. Naturally over time, capitalistic economies sway from bouts of extreme fear to extreme greed. It’s the coolest heads that prevail during all of these cycles… the individuals that can calmly and steadfastly look out over the horizon and prudently invest for the long term. Am I saying that now represents a great buying opportunity? It depends. If you’re evaluating investments in B-C class multifamily in solid metro markets or unprofitable, tech growth stocks, the answer might be very different. What I am saying is this: today there is a ton of fear in the market across asset classes. Friends are no longer recommending meme/FOMO stocks and cab drivers no longer asking me for my opinion on the latest NFT issuance. The exuberance we’ve experienced over the past few years seems to have finally come to an end. The news and online community believe that a Fed-induced recession is all but a given. Stocks, commodities, housing prices, and bonds are all selling off. But just as the future gets heavily weighed into prices during upswings (the market ‘pays’ for expectations after all), during downturns the future seems to be completely discounted as though conditions today will persist forever.
They won’t. If there’s one constant in all markets, it’s change. Savvy investors know that and they take advantage of the pessimism as ‘the baby is thrown out with the bath water.’ They look for undervalued assets with solid long term fundamentals during these periods. In short, they shed their emotions as well as others’ opinions and they do something that can seem so counterintuitive during these episodes: THEY GET TO WORK. They measure risk and price it. They make cold, calculated decisions knowing those decisions may not pay off in 3, 6, 12 or even 24 months (the average recession lasts 17 months). But eventually, when winter is over and the pendulum swings back, they will be vindicated.
Consumer sentiment is down. Recession is on the tip of everyone’s tongues. Inflation is rampant. Great! Now it’s time to get to work.
