Do you want to know if an economic recession is coming? Well, if you want to have some fun, and do what many people do to get an answer to the question, try this: Go to Google (or Bing or your favourite search engine) and type in: is a recession coming.
You want to know what the answers tends to be? Well, it tends to be that, yes, a recession is coming. Do you want to know what the problem is with drawing the conclusion that a recession is coming? Two things. First, as has been mentioned on this website before, economic and investing experts are not mind readers or crystal-ball experts. So, they can’t predict the future. No one can.
Second, of course a recession is coming. Recessions happen from time to time. The problem is that we don’t know when, and anyone who tells you for certain when one will come should be greeted with some caution.
Avoiding the herd
Investor psychology is something any investor should take into account when making investment decisions. In a nutshell, investors, or anyone associated with the world of investing, love to engage in a herd-type mentality. When something looks like it’s happening, such as a recession, or a stock plunge, everyone expects it to happen, and rushes to confirm it. That’s why investment decisions should never be made based on this type of herd mentality.
If you want an example of everyone expecting something to happen, and it has yet to happen, just take a look at our own housing sector here in Canada. For years now, everyone has been predicting a bursting of the apparent housing bubble. There’s only one problem, however. It has yet to happen. Yes, government measures have considerably slowed down the market in Vancouver, but we have yet to experience a burst in the way many have predicted.
Always expect the unexpected
So, what does this all mean when it comes to analyzing the global economy and making wise investment decisions as a result? Well, it means what we’ve been preaching all along. A good approach to investing means looking at the long game, not the short game.
John Templeton, the famous investor and fund manager, took a value-based approach to investing that involved long-term returns that survived short-term stresses. In fact, there are graphs that show the huge long-term success of this kind of approach to investing.
Does this mean you have to be a value-based investor? No. But it does mean that recessions, or any other financial stresses, should always be part of an investment strategy. That’s because no one can predict when they come. But, when they do, wise investors will be ready.
ASCEND GRP is an asset-management firm, with offices in Toronto, Richmond Hill, and New York, that services clients seeking investment opportunities worldwide.