Warren Buffett: How to Make Money During the 2023 Recession

So if you're worried about the economy right now, you're in pretty good company. According to a study done by CNBC, a whopping 81% of Americans are worried that a recession will be hitting the U.S. this year. You can add billionaire investor Warren Buffett to the list of people that are worried about what's happening in the economy.

You see, as CEO of conglomerate Berkshire Hathaway, Buffett has up-to-the-minute insights into the current health of the economy that is unmatched by anyone else. Berkshire owns over 65 different subsidiaries in a wide variety of industries, from fast food to building materials to even an entire railroad network. Each week, Buffett gets to see how these companies are performing—whether sales are growing or shrinking, whether companies are moving more or less goods on the railroad, if people are still going out to eat at his restaurant, Dairy Queen.

With all of this insight, it got my attention when Buffett said in a recent interview that, without a doubt, the economy is slowing down dramatically. However, there is one big difference between how Buffett and the average person views recessions. The average person views recessions as a threat; Buffett, on the other hand, views them as an opportunity. This dynamic is why this video is so important. After you've watched this video all the way through, you will walk away with tangible principles from Buffett, and these principles will not only help you survive the economic storm that's coming but instead thrive and build wealth for yourself and your family.

There are three principles from Buffett that you can start applying today that will help you build wealth, regardless of what's happening in the economy. The first is to view stock market declines as an opportunity. Let's talk a little bit about the fact that the market's down almost 800 points this morning. Yeah, concern for you? Well, no, that's good for us, actually. We're a net buyer of stocks over time.

And just like being a net buyer of food, I expect to buy food the rest of my life, and I hope that food goes down in price tomorrow. So when stocks are down, we're going to be buying on balance. And who wouldn't rather buy at a lower price than at a higher price? People are really strange on that. I mean, most people, most of your listeners are savers, and that means they'll be net buyers, and they should want the stock market to go down. They should want to buy at a lower price, but they've got that feeling that they just feel better when stocks are going up.

What Buffett said may sound obvious, but nearly everyone approaches investing in the complete opposite way. People get excited when their stock portfolio is up two percent in a day and then turn around the next day and be sad, upset, and frustrated because their portfolio fell in value. If you are what Buffett refers to as a net saver, you should welcome stock market declines with a smile.

Here's what that means: When Buffett uses the term "net saver," he's referring to someone that is currently spending less than what they earn. The difference between what someone earns and what they spend is their savings. So for most people, the goal of saving that money is to hopefully be able to live off that money one day and not have to work.

Okay, so let's say someone saves and invests two hundred dollars each week from their paycheck. They study Warren Buffett and watch investor-center videos, so they know they need to be investing that money. For the average person, the easiest and most straightforward way to invest is through the stock market.

You're about to see the numbers behind why falling stock prices are a good thing if you're a net saver. You see, each share of stock represents a tiny ownership stake in a business. Buying one share in a company makes you a part owner of that business. Each share you buy makes you a larger and larger owner.

So, with that understanding, shouldn't your goal be to be as large of an owner as possible in the company? The more of a company you own, the bigger your portion of the company's profits you're entitled to. Okay, so now you've identified a stock you want to buy. The stock currently trades at two hundred dollars a share, and given that you're able to save two hundred dollars each and every week, that means you can afford to buy one share in the company per week.

After a few months of the stock price staying the same and you buying that one share every week, the economy enters a recession. The entire stock market falls, including this beloved stock of yours. The price of the stock fell from two hundred dollars to one hundred dollars—a reduction of fifty percent. Ouch! Everyone that you know is upset that the stock market fell and the value of their stocks plummeted.

Every day, on the news, you see the reporter talk about the trillions of dollars investors in the stock market have lost as a result of this decline. All you hear about is how stocks are lousy investments because they've fallen in price. However, this gets you thinking: Hey, the company that I was buying stock in is still a great business because the stock is now trading at just one hundred dollars a share.

That two hundred dollars a week I'm saving and investing can now buy me two shares in the company as opposed to just one. Now that's absolutely a bargain! You keep buying shares like clockwork, week in and week out, despite the fact that everyone is telling you you're crazy. A few years go by, and the economy inevitably improves, and the stock price recovers. Everyone is now saying you're a genius, and you are so brave to keep buying the stock when the price collapsed.

However, you know the truth: it wasn't bravery; it was simple math. You could buy double the amount of shares that you were before because the share price got cut in half. When you understand this concept, you will think about stock market declines in an entirely different light.

But in order to even invest in the first place, you have to have some extra money that you've been able to save. When Warren Buffett was growing up, he delivered newspapers each and every morning starting at 4 a.m. in order to have the cash to buy stocks. But thankfully for us, the internet has made things a whole lot easier. Now there are online websites where you can do things like open up an investment account and get forty dollars just for signing up, which brings us to the sponsor of our video: Free Cash.

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Sign up for free today and get started earning cash that you can then use to buy stocks. Now, back to the video. The second principle on our list is to avoid do-something bias. If you worry about corrections, you shouldn't own stocks. I mean, if you can't take your stock going down, it's going to go down sometime if you own a stock, so why worry about it? I mean, the point is to buy something that you like at a price you like and then hold it for 20 years.

You should not look at it day to day. If you bought a farm or apartment house, you wouldn't get a quote on it every day or every week or every month. So it's a terrible mistake to think of stocks as something that bob up and down, and you should pay attention to those bobs up and down.

Do-something bias, also referred to as action bias, describes the natural human tendency to favor action over inaction. I first learned about the psychological bias when I listened to Charlie Munger's legendary speech titled "24 Standard Causes of Human Misjudgment." In this speech, Munger goes over 24 psychological biases that prevent people from being successful. On this list was the so-called do-something bias.

This bias exists because many times, it actually is in our best interest to have a tendency toward action. This dynamic is reflected in popular quotes such as "The journey of a thousand miles begins with a single step," and "The secret of getting ahead is getting started." In most endeavors, society clearly rewards those people who are compelled to take action.

So suppose you're a soccer goalkeeper, or football for our friends outside of the U.S. You're preparing to block a penalty kick in the middle of an important game. If you're like most goalies, when attempting to stop a penalty kick, you'll jump to either the left or the right nearly every time. Yet your chances of successfully blocking the kick are statistically greater if you simply stay still.

So what compels you to jump instead of standing your ground? It is the action bias or notion that doing something is better than doing nothing. You may feel that people will judge your failure to make the save less harshly if you could prove that you made an attempt to stop it. Unfortunately, and as counterintuitive as it feels, in this case, it's inaction that increases your odds of success.

This action bias can have devastating results when it comes to investing. Whenever there is a dramatic move in the stock market, oftentimes people get the overwhelming urge to do something. This applies when prices are both rising and falling. When asset prices are rising, this takes the form of people experiencing FOMO or fear of missing out.

They see other people making what appears to be easy money on some speculative asset, and it becomes painful for them to sit on the sidelines. Eventually, the action bias compels them to get involved themselves. This often exacerbates the bubble further. When the bubble eventually bursts, the people that bought into the bubble last are the ones that lose the most money.

The action bias is also at play when stock prices are falling. For the average person, their investment portfolio constitutes the majority of their net worth, which makes stock market declines all the more uncomfortable. There is also a large amount of uncertainty about whether the price declines will continue.

This combination of uncomfortableness and uncertainty is a perfect recipe for the action bias to reveal itself. When faced with these feelings, people feel like they must do something. But unfortunately, for most investors, that usually means selling out at the bottom of the market. Charlie Munger has a quote about investing that I think we should all keep in mind: The big money is not in the buying and selling, but in the waiting.

This quote is extremely powerful. Investing is one of the rare activities for which more action does not mean better results. Think about it: If you want to lose weight, you exercise more. If you want to learn more about a topic, you spend more time reading books on the subject. But this is not the case when it comes to investing.

While respective value investor Monish Pabrai sums it up with this saying: All investor miseries come from the inability to sit alone in a room and do nothing. Moving into number three on the list: Build a personal fortress balance sheet. In terms of the potential for a credit crunch coming through what the banks are going through right now, there's been a lot of speculation about what that could mean for the economy.

Is it going to mean a 0.5 percent hit to GDP? Is it going to mean a percent hit to GDP? What would you guess? I would say that I’ve been in business running Berkshire for 58 years, and I’ve never applied an economic forecast of any use to the company. All we have to do is keep running every business as well as we can, and we got to keep plenty of cash on hand so that people can keep making intelligent decisions rather than those forced upon them.

And that's all we know how to do. If I depended in my life on economic forecasts, you know, I don't think we could make any money. I don't know how to do it. And, you know, people want to get them, so they get them, but it has no utility. When I find one of our companies that's hired somebody to tell them what's going to happen in the economy, I mean, they're throwing money away as far as I'm concerned.

The biggest reason why Buffett doesn't see recessions as a threat is that he builds Berkshire Hathaway to have what he refers to as a fortress balance sheet. So, in simple terms, a balance sheet shows everything that a company owns in one section and everything it owes in the other. Having a strong balance sheet allows a company like Berkshire to weather a financial storm.

Let's take a look at Berkshire's balance sheet. At the end of 2022, Berkshire had 32 billion dollars in cash and another roughly 93 billion dollars in short-term treasury bonds, which is essentially Berkshire's version of money in a high-yield savings account. These two categories combine to total over 120 billion dollars of essentially cash Berkshire can use if it ever is in a pinch.

This financial strength is unparalleled by virtually any other company in the world. However, this doesn't just happen by chance. This is a very deliberate action by Buffett. He manages the business in such a way to make sure it never overextends itself and risks falling into financial trouble.

While the term "fortress balance sheet" is most commonly used to describe a company, it can also make a ton of sense for us as individuals to run our own finances with this goal. Let's say we have two people: Jack and Matt. Jack hears the advice about the importance of having a fortress personal balance sheet.

This is what his personal balance sheet looks like: on the asset side, he has fifty thousand dollars in cash, another seventy-five thousand in stocks, a car worth ten thousand dollars, and a house that is worth three hundred thousand dollars. On the liability side, aka how much money Jack owes, his only liability is a two hundred thousand dollar mortgage on his home.

On the other hand, we have Matt. Matt's assets consist of ten thousand in cash, twenty thousand in stocks, a car that is worth forty thousand dollars, and a seven hundred thousand dollar house. So, at first glance, you may think Matt is in a better financial spot than Jack. I mean, after all, Matt's assets are worth more than Jack's. However, just wait until you see Matt's liabilities.

He has twenty thousand in credit card debt, a fifty thousand dollar car loan, sixty thousand in student loans, and then a mortgage balance of six hundred and fifty thousand dollars. So now that we know the personal balance sheets of both Jack and Matt, who do you think is better prepared if there is an economic downturn? My money would be on Jack.

Look at all of the money Matt owes. He has credit card debt, the car loan, student loans, and the large mortgage. Matt has to make pretty sizable payments each and every month just to stay current. He also doesn't have a large cash balance, meaning that if his employer were to see his business decline and have to lay Matt off, it wouldn't be long until he runs out of money.

An economic slowdown could spell disaster for Matt because of how weak his personal balance sheet is. On the other hand, if we look at Jack's balance sheet, we can see the only money that he owes is his mortgage—it's a third of the size of Matt's. Additionally, Jack has a lot of cash in stocks that he owns that he could live off temporarily if he were to lose his job.

In fact, if there were to be an economic slowdown, he could actually use his savings to buy stocks at more attractive prices. Given that Jack has built his personal balance sheet, a recession could actually be an opportunity for him. While this example is obviously simplified, it should serve as a helpful framework to demonstrate why this concept of a fortress balance sheet is so important.

So there you have it! Make sure to subscribe to the channel because it's my goal to make you a better investor by studying the world's greatest investors. Talk to you again soon!