Most economic analysts expect the world to slide into a recession in 2023. Already, virtually every financial market is down in 2022 and there is no turnaround in sight. We sat down with Eugene Plotkin, the renowned Wall Street investment banker and CEO of TechWallet, to find out how investors can stay above water in this difficult environment.
“There is a saying that fortunes are made in the down market and collected in the up market,” explains Eugene Plotkin. “Some of the world’s most successful investors, including Warren Buffett, have made their greatest investments during times of economic adversity.”
Well, with Buffett’s net worth of $101 billion, that we know. For us mere financial mortals, the Berkshire Hathaway chair’s calculations really boggle the mind.
Eugene Plotkin: Think Long Term With Index Funds
Buffett once told a CNBC reporter that $10,000 invested in an index fund in the 1940s would be worth more than $50 million today. While Buffett is a stock picker renowned for making bold bets and holding them for many years, he often recommends that regular investors simply put their money in index funds.
“Many famous investors tell people to invest in index funds, but, funnily enough, they don’t follow their own advice,” Eugene Plotkin says. “The problem with index funds is that during stock market downturns they produce negative returns. There is this idea that the stock market always goes up over time, but it all depends on the time horizon.”
To the unin-stock-trinated, a time horizon, or planning horizon, is the period of time during which an investor evaluates the investment. For example, when an investor buys a 2-year Treasury note, the investor’s time horizon is two years. On the other hand, when an investor buys stock in a company the time horizon can be much longer.
“There have been entire decades during which the stock market has produced flat or negative returns, such as the 1930s and the 1970s,” Plotkin explains. “During those periods, the last place you would want to be as an investor is index funds. So, my first piece of advice is to consider timing. When a recession is coming or possibly already underway, it may make sense to exit stocks altogether and wait for a better entry point.”
Feeling Bullish, Seeing Bearish? Study the Market, Says Plotkin
The period from 2010 to 2021 was one of the longest bull markets in stock market history. All the major stock indexes continually went up, posting record high after record high. Even after the pandemic crash of 2020, the markets rebounded quickly and went on to new highs.
“During sustained bull markets people assume that everything will continue to appreciate indefinitely,” Eugene Plotkin says. “This is a dangerous mirage. The problem is that even when the market begins to signal weakness, many investors assume the weakness is transitory. So, my second piece of advice is to look at economic fundamentals. The stock market reflects corporate health and growth prospects. When consumers have less money to spend because of a recession, companies will sell fewer goods and services, their growth rates will slow and possibly reverse, and their stock prices will be affected.”
Over the past months, there have been multiple examples of companies projecting slowing growth, reducing costs, and laying off workers. Even high-flying technology companies have made significant cuts to their headcounts.
Hunt for Higher Yields
“We are also dealing with inflation right now, meaning prices are much higher than they were even a year ago. The problem is that salaries are not keeping up,” Plotkin explains. “When folks are worried about paying for basics, like food, gas, and rent, they have less money to spend on everything else. Add to that the increase in interest rates, and you have the perfect storm. Now all that mortgage debt, auto loans, and credit card debt is that much more expensive. So, my third piece of advice is to consider interest rates. With high interest rates, it is harder for companies to borrow and fund growth. At the same time, as an investor, I can now find much more lucrative returns in the fixed income markets.
“As a result of interest rate hikes by the Federal Reserve, many banks are now offering more attractive rates for savings accounts and CDs. In addition, newly issued government bonds, long considered a safe haven for investors, are now offering higher yields than they have in a long time.”
Eugene Plotkin Urges Caution With Crypto
Perhaps there is no market that has displayed more volatility than cryptocurrency, which went from red-hot to bust in a matter of months. “Over the last several years, a lot of investors have gone into alternative markets such as cryptocurrencies and NFTs,” Eugene Plotkin says. “Recently, the valuations in those markets have been slashed by 50% or more. It has been a bloodbath. So, my fourth piece of advice is to always be careful with emerging or unproven markets. Usually, it is the very first investors that capture returns in such markets and most others are left holding the bag. If you are serious about capital conservation, you should limit your portfolio’s exposure to such markets.”
To that end, the best known cryptocurrency, bitcoin, has seen a drop of 70% from its highest prices. Many less-known cryptocurrencies have collapsed by an even greater margin, with some disappearing entirely. As a result of the easy money policies embraced by many governments over the past couple of years, there have been many asset bubbles,” Plotkin concludes. “Everything from housing to crypto to public stocks to tech startups has seen unprecedented valuations. This is not sustainable. And investors who have seen these types of bubbles before understand this for the transient phenomenon that it is.”
Plotkin’s Advice for Investors of All Levels: ‘Be Patient’
“My fifth and final piece of advice is to stay patient. The world’s most successful investors, such as Warren Buffett, made their fortunes over years and decades of patient investing in fundamentally sound businesses.”
Eugene Plotkin points out that many new and recreational investors do not think in terms of multiyear time horizons. Instead, they chase the quick win and, in the process, many find themselves dealing with a quick loss instead.
“Patience is key. Wait for the market to give you the right entry point,” Plotkin counsels. “During recessions, there is a lot of volatility and impatient investors can get wiped out quickly. Rather than try to play the ups and downs, my overall advice is to identify strong businesses, find attractive entry points, and then invest for the long haul.”
