As the market is booming, it becomes easy to lose sight of the fact that what goes up also comes down. Economic slowdowns are cyclical, and recession might be imminent in the near future or sometime later. As per Kavan Choksi, no matter the case, it is always important to prepared, and learn about how to invest during a recession. He further mentions that value stocks generally succeed in “ordinary” recessions owing to low valuations and sectors with strong enterprises.
Kavan Choksi Briefly Discusses The Essentials Of Investing In Stocks During Recession
The idea behind value investing is to pay undervalued stocks in order to sell them when they approach their true or intrinsic value. Prices of the stocks of a well-established and reliable company can go down during a recession, thereby providing opportunities for value stocks. With the help of foundational company analysis, investors can determine what the intrinsic value of a stock is and invest accordingly. Once an investor purchases an undervalued stock during a recession, the price of the stock ultimately increases towards the intrinsic value as the situation normalizes and hence helps them to earn a good profit in the process.
Economic downturns like recessions invariably open up a number of opportunities for investors to purchase undervalued stocks that have been oversold in the panicky market climate. Moving into value stocks that pay dividends can especially be a smart way to leverage this opportunity. Even if the share prices of a company keep falling, it might still continue to pay dividends to investors that can provide investors. This provides investors with a steady stream of income to protect them against further market bearishness.
Defensive stocks are also usually not too affected by the changes in the business cycle, including during a recession. Companies that sell essential goods and services, like electricity, food, shelter, energy or healthcare, are typically non-cyclical and less exposed to economic cycles. The utilities sector is known to be a popular defensive play in this regard. After all, no matter whether the economy is booming or in the doldrums, people would need energy, power and water.
Value stocks also make a lot of sense as a defensive option. In general, defensive stocks are known to have a market beta of less than 1. This means that they shall outperform the broader market when the index falls. On the other hand, cyclical stocks ideally have a market beta of more than 1, and therefore they are likely to underperform when the index falls. Even though value investing is commonly linked with cyclical companies, a large number of value stocks in the equity market of the United States are actually defensively tilted rather than cyclical.
Kavan Choksi mentions that it is important that investors do not get too excessively influenced by short-term market movements during the recession. Markets might turn bearish for a period, and they may even crash amid a prolonged downturn. However, they will invariably bounce back, and when they do, the market might even scale higher peaks, which would be the right time to sell off the value stocks for greater profits.