Welcome to the Morningstar series, "Ask the Expert." I'm Holly Black. With me is Dan Kemp.
He's Chief Investment Officer at Morningstar Investment Management. Hello.
Hello, Holly. So, we're here today to look at what happens
if we go into recession. You and I are really boring, and we always say, "Don't do anything,
just ignore it." But sometimes you do have to do something. So, where do we start?
Absolutely. And recessions are generally big and quite rare events. And so, it is worth
thinking ahead of time. We're not in a recession at the moment as far as we know. So, thinking
ahead of time, or what you would do as an investor in a recession and preparing accordingly.
And the first thing to remember is that recessions can be great times as an investor, because
normally prices are lower than they normally are. And so, that gives you an opportunity
to buy assets more cheaply and so, to sow the seeds of future growth. So, recessions
can be a great time. The problem is, they don't feel like a great time to invest. And
so, when you have an opportunity to do something, but all of your gut instinct is telling you
to do something else, that's normally where we have to guard against behavioural biases,
making bad decisions, doing the wrong thing. And so, by preparing ahead of time, if we
find ourselves in a recession, then we'll have some rules of thumb in order to help
us make better decisions and know what to do.
But that is it. When you're investing you do quite often have to fight your instincts.
So, in your head, you're saying, "Sell, sell, sell." But actually, you should probably keep
just drip-feeding little bits of money in? That's exactly right. So, lesson number one
is to continue to invest. Recessions are very different from market crashes. So, normally,
in a market crash, the danger is that you make too many decisions, and you get whipsawed
and make a series of bad decisions. In a recession, people normally get a bit bored of investing
and a bit fearful and so, don't make too many decisions, they actually make too few. They
tend to stop investing, because they feel that there'll be a better time to invest in
the future. But in reality, some of the best returns are claimed, are achieved during a
recession. And so, it's worth staying invested, and also continuing to invest new money through
a recession. And one of those behavioural biases is called
recency bias, where we all get worried about something that's in our recent memories. And
that will be for a lot of people that 2007-2008 crash, and we don't want that to happen again.
But actually, we should probably be thinking of into the future and concentrating on our
goals. That's exactly right. And if you don't have
investment goals, it's difficult to do that. And so, it's really important whenever you
start an investment, to think about what the goal of that investment is. If you don't have
a goal, then all you have to measure it by is what happened yesterday or over the last
year or six months. And as you say, because of something called recency bias, where we
tend to expect the near term to look like the recent past, then that can lead us to
make some terrible decisions. And so, really important to have an investment goal, and
to always measure your returns that you're getting for your investment against that goal,
see if you're still on track. And if you do that, it's really going to help you to continue
to invest through that recession. But of course, you shouldn't just buy everything,
you still have to pay attention to those fundamentals and valuations. And it's not just an opportunity
to go supermarket sweep from the stock market. No, absolutely it isn't. And we are, as you
know, long-term valuation-driven investors. And so, value is always at the heart of what
we're looking for in an investment. The difficult thing in recessions is that sometimes equity
stocks, shares can appear to be expensive, because the profits on which you tend to base
your valuation view are depressed. Most companies go through cyclicality, these economic cycles,
so at times their profits will be very high, we're seeing that at the moment and times
when they will be very low. And so, when you're looking at a company's share price and thinking
about its value in a recession, then be aware that it might look expensive, because those
profits are unusually low. And as the profits rise, as a country or a company recovers from
that recession, then what you'll see is that company will actually get cheaper, the share
gets cheaper as the prospects often improve. And so, when you're thinking about valuation
and recession, you have to think about it slightly differently from valuation when prices
are very high. Well, thanks so much, Dan. Great top tips.
And thanks for joining us.