11 Things Warren Buffett Says About Recessions

Warren Buffett is arguably the greatest investor of our time. Over an investing career that stretches back to 1941, he amassed a net worth that would likely be above $100 billion had he not committed to giving so much of his fortune away. With a career stretching back that long, he has seen his fair share of economic ups and downs, yet he has still managed to invest successfully through them.

That makes him a wonderful source of information on how to think and invest when times are tough and the economy is in a recession. These 11 things Warren Buffett says about recessions can go a long way towards helping you get your portfolio through the recession and prepared for the better times that are hopefully to come.

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"Only when the tide goes out do you discover who's been swimming naked"

This refers to the fact that during a strong economy companies can paper over all sorts of problems and use financial engineering to cover up the lack of a solid foundation or strong core operations. When times go sour, financing (also known as liquidity -- hence the swimming reference) often dries up. It's during those times that it gets easy to figure out which companies had been faking their prosperity, because they're often the first to get into financial trouble.

By the way, this is a great argument for diversification in your portfolio. By the time you recognize that the tide has gone out, it's often too late for you to sell and get out of the companies that had been "swimming naked."

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"We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful"

As a value-focused investor, Buffett is attracted to companies available at cheap prices. That usually only happens when other investors have run away scared of the company's prospects. The market is often down in a recession because investors either get scared of their companies' prospects or because those investors need the money to cover their costs. That's when Buffett likes to step in, and it's how he engineered bailout deals during the financial crisis that he eventually profited immensely from.

"In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497."

This quote serves as an excellent reminder that a lot of stuff has gone wrong in the past -- including some nasty recessions -- but that the market and investors have persevered and ultimately thrived. It also serves to show the incredible power of a long-term approach to investing. That rise means that a $100 investment at the beginning of the century would be worth over $17,400 by the end of it, despite the chaos that happened during the century.

"I don't look to jump over 7-foot bars: I look around for 1-foot bars that I can step over."

When times are going well, Buffett often gets criticized for holding on to such a large stash of cash. That cash piles up in his corporate accounts because when times are going well, investors price stocks richly based on high expectations for the future. When the economy and market turn sour, investor expectations price stocks lower due to fears of a much dimmer future. That lower price turns a "7-foot bar" into a "1-foot bar" that is much easier for Buffett to step over, and that's generally when he buys.

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"You know, people talk about this being an uncertain time. You know, all time is uncertain. I mean, it was uncertain back in - in 2007, we just didn't know it was uncertain. It was uncertain on September 10th, 2001. It was uncertain on October 18th, 1987, you just didn't know it."

Oct. 19, 1987 is often known as "Black Monday" -- a day the stock market dropped more than 20%. Sept. 11, 2001 was the day of the Al Qaeda attacks on the United States. 2007 was just before the financial crisis hit us. Buffett's quote reminds us that the future is always uncertain and that risks are always ahead of us. Yet the market doesn't tend to price in risks it isn't aware of, but it sure prices in those risks once they're staring us in the face.

With that mindset, it becomes easier to recognize that the time to prepare for risk is when the rest of the market doesn't see it. That way, once the market does recognize the risk and prices it into stocks, you can be in a better spot to potentially be a buyer at low prices rather than a panic seller with a need to raise cash.

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"I think the most important factor in getting out of the recession actually is just the regenerative capacity of - of American capitalism."

This is most easily explained via a related saying in the oil business that "the cure for high prices is high prices." When oil prices get too high, producers shift to unconventional sources of energy (like oil sands and shale) that cost more but can be profitable if prices are high enough. Similarly, when prices get too high, consumers start to shift their driving and other energy-use habits to be more energy efficient. The combination ultimately drives prices back down, "curing" the high prices.

Similarly, investors and entrepreneurs use prior failures and challenges to learn what worked and what didn't in the past. Those factors help them adjust their strategies and tactics to reduce the risk of repeating the same failures of those that came before, helping provide a better foundation for future growth. That's what ultimately drives the subsequent economic recovery.

"Today people who hold cash equivalents feel comfortable. They shouldn't. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value."

In times of uncertainty, having cash feels calming. If you lose your job, or if your stocks crash, that cash stays cash and can still be spent to cover your costs. Having some cash can be useful, but in today’s low interest rate environment, cash provides almost no return in nominal terms. After accounting for taxes and inflation, it almost certainly will provide negative returns.

The upside to low rates, however, is that they force people with money to put that money at risk if they want any chance of preserving and eventually enhancing their purchasing power over time. That means stocks, bonds, and other investments that provide the capital that fuels the economy. Those investments power the innovation and ideas that will eventually pull the economy out of the recession.

"It's never paid to bet against America. We come through things, but it's not always a smooth ride."

If ever there was an optimistic Buffett quote for today's times, this one is it. A viral pandemic, unemployment above 11%, enforced economic shutdowns, and riots and racial unrest are all converging at the same time to radically test the country's resilience. Still, Buffett is backing up his optimism with his cash via a recent purchase of natural gas storage and transmission facilities for nearly $10 billion.

That's a large bet on critical energy infrastructure in a time of very high uncertainty. It's a clear signal of Buffett's optimism that America will get through this mess and continue to use natural gas as an important source of energy.

In a 1974 interview with Forbes, Buffett was asked how he felt about stocks. His response was reportedly "Like an oversexed guy in a whorehouse. Now is the time to invest and get rich." During that time, the United States was in a severe recession, and stocks were down as high interest rates attracted investors to the high returns available in bonds and other safer investments.

As it turns out, Buffett was absolutely right, and investing in stocks as other investors were abandoning them in the 1970s was an incredible way to build wealth in the subsequent decades. Of course, it takes the gumption to invest while others are abandoning stocks, but Buffett's story provides clear evidence of how happy the ending can be if it works out in your favor.

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"I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years."

This quote is a great reminder that stocks represent ownership stakes in businesses. Ultimately, your success as an investor is tied to the success of the business behind those stocks. In a recession, when earnings and near-term prospects are low, you can often buy a stake in those companies for a cheap price compared to what they would fetch in normal times.

If you do buy when times are tough, though, you have to recognize that you don't know when times will improve and your investments' earnings will increase. As a result, Buffett's quote reminds us that you have to have the patience to invest as if the market will remained closed for a long period of time, to give the companies time to improve their operations.

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"Predicting rain doesn't count. Building arks does."

Ultimately, your success as an investor depends on how you actually allocate your money. If you recognize that there are risks in the economy and risks in investing, that's one thing. Taking the appropriate actions to reduce the impact those risks have on you while still focusing and investing for the long term is the ultimate in "ark building" thinking.

In Buffett's case, you see it in the investments he makes. His portfolio contains several critical infrastructure companies like power, natural gas, and railroads, as well as insurance businesses that come up with cash when things go wrong. That combination of preparing for when things go wrong while investing for future growth is the hallmark of Buffett's success as an investor. And if it works for Buffett, chances are that it's a good recipe for the rest of us trying to successfully make our way through a recession.

Chuck Saletta has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.