The longest economic expansion in the entire history of the United States lasted from March 1991 through March 2001, a period of 120 months. Right now, the United States has not experienced a recession for 118 months, with economic expansion characterizing the period from June 2009 through the present. If there is no recession prior to summertime, this will be the longest uninterrupted period of growth in the history of the United States.
When we are amidst such a period of economic growth, I believe the question of “What to do next?” involves re-focusing on the very things that we ought to be doing all along.
Primarily, this means focusing on cash and fair valuation for any investments that you make.
Regarding cash, the appeal of keeping 10% to 20% of one’s assets available as dry powder is nearly self-evidence. To paraphrase Warren Buffett’s citation of his grandfather, “Cash is like oxygen. It is never thought about when it is present, but the only thing on your mind when it is absent.”
At a minimum, if you own any investments, you need to make sure that your family has enough cash around so that no investments must ever be sold when the market is a low. It is not an exaggeration to say that decades of your best efforts can be undone if you have to sell low. And opportunistically speaking, having cash and deploying it during a recession is how you get a decade of 13-17% returns from a given pool of capital.
Secondly, the best way to prepare for a recession is to refocus making investments that are trading at valuations that are attractive and cognizant of earnings power rather than investments that require a best-case scenario to work out. Many great companies with double-digit growth prospects are trading at P/E ratios in the 30-50 range. For most of them, now is probably not the time to make sizable commitments to them.
Recessions hit those in the stock market the hardest whose portfolios consist of overvalued stocks moving to undervalued status rather than those whose portfolio is largely filled with fairly valued and undervalued stocks at the start that just happen to become cheaper. The delta is what gets ya.
To that end, I have posted another update for the Conservative Income Investor’s Patreon subscription service that you can access by clicking here, which focuses on an industry giant that has now become discounted using traditional metrics and is primed for double-digit returns from the current price point. Best of all, if a recession were to occur, it’s already at a price point that would make the price declines less significant than what is likely to occur with other publicly traded firms with similar growth profiles.
The following Buffett line often comes to mind: “The less prudence with which others conduct their affairs, the greater the prudence with which we should conduct our own affairs.” Being selective about valuation is always smart, but is especially intelligent when a country is further removed from a recession than it has nearly ever been in its history.
Originally posted 2019-04-14 19:00:30.
