Market corrections and recessions allow investors to take a hard look at their portfolios. They make investors rethink about their holdings and if they need to change anything. The good investors like Warren Buffett and Charlie Munger, are legendary investors who know what to do in certain times of chaos. Here are some of the points that they have done or may do in such uncertain times.
1. Removing holdings that they have little conviction over
If there is one thing that must be reiterated during such uncertain times, that is to remove holdings that the investor has no longer any conviction over, the company is continuing to burn massive amounts of cash and are currently still not profitable at all or that the company has changed and pivoted to another area. Holdings that are burning huge amounts of cash which take up a significant proportion of the investors portfolio should really be relook and studied very carefully because the question to ask is “Is the company currently burning up all its cash?”. Usually, companies that are still burning cash are unlikely to pull through the entire market correction or recession and come out on top.
Investors who were chasing companies during a bull run just because their share price kept on going up to 200-300% in value should reconsider these holdings in a market correction or recession. The investor should ask “Did I buy this just because of pure FOMO and from all the hype about what other people are saying about this? Did I buy this purely without looking deep into the company and what the company is currently doing?”
2. Adding onto holdings that produce dividends that have a steady track record
Dividends are often looked down upon during a bull market where everyone is in a state of euphoria. But when it comes to market corrections and recessions, holdings that distribute dividends tend to shine. Why is this so?
The dividend that a holding pays out to its shareholders not only shows that the company is big enough, but it is also mature and profitable and now it is willing to share its profits with its shareholders. Holdings that have a steady track record for dividends tend to outperform the market during market corrections and recessions.
Then the next question comes, “What does the investor do with the dividends collected?”
The answer is very simple. The investor can spend the dividends collected on daily needs like food, water and transport etc or the investor can simply use the dividends to increase the number in that particular holding, translating to FREE shares. This is the power of compounding. It is exactly what legendary investors would do!
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