Find out how to invest like Warren Buffett during economic recession

Between 2020 and 2022, stocks skyrocketed. This year, they have been sharply fell. The S&P 500 is down about 18% year-to-date Inflation rates are also at 40-year highs.

Amid this chaos abounds, investors have more concerns as they do not know how to deal with stock markets. The easy-money environment that many investors grew accustomed to over the past 13 years is in the rear view mirror. Warren Buffett has even warned investors at his annual Berkshire Hathaway shareholder meeting in April. "They don't make money unless people do things, and they get a piece of them. They make a lot more money when people are gambling than when they are investing."

The difference between gambling and investing lies in understanding a company's fundamentals. Technical analysis is based largely on stock price and volume. Traders aren't trying to predict the future of a company. They don't look at the underlying business or the economy but instead use charts and identify patterns to predict where a stock is going.

Stock Market is Not a Casino

The number of investors saw a significant increase, as many investors poured their extra cash into the US stock market over the past two years. However, as these investors had no investment experience, their investments were based on news about the rise or fall in the prices of certain stocks.

Misleading information and investments, based on the evaluation of stock prices only, led some stocks to rise 100% within a few months.

These stock rallies were largely based on technicals — a coordinated short squeeze — and not on whether companies were viable in the long-term.

That indiscriminate buying helped turn Wall Street into a "gambling parlor," Buffett said at his company's April meeting.

Technical analysis is useful for short-term trading and for timing markets, while fundamental analysis is useful for long-term investing, which is less susceptible to the whims of the economy.

Over the long run, equities tend to outperform inflation and recover from downturns by a wide margin, but it's a marathon — not a sprint. Buffett is known to say that his favorite stock holding period is forever.

Fundamental analysis doesn't tell investors much about what will happen in the immediate future, but when it's time to hunker down and get through the hard times, fundamental investing is the way to go, analysts say.

Trust yourself

Steven Check, who runs the financial advisory firm Check Capital, said that investors are not very good at predicting the future. They tend to overreact to immediate problems.

The market is irrational in the short term, but it's always rational in the long term.

Bubbles grow and burst but if you consider how a business will do over the next decade and then stick with it "you'll eventually end up being rewarded," he said.

On the other hand, Shawn Cruz, head trading strategist at TD Ameritrade said it is likely that companies with strong balance sheets, healthy cash balances and growing revenues are currently priced at a discount.

So if investors have a long term focus and some specific names they are looking at, this is a good time to pick up some quality shares for your portfolio.

Do the homework

The good news for the lazier investors, a plenty of experts have already done the research for those investors and — for a small fee — investors can gain easy access to it.

But if investors are going by Buffett's rules, it's important to do the work themselves and never invest in a business they don't understand.

A good place to start is by reading up on a prospective company. Look at who is managing the business, what it's promoting and how.

Next, take a look at the company's financial statements, which are typically available on their websites. Evaluate their balance sheet. Do their profit-loss statements, cash flow statements, operating cost, revenue and expenses seem healthy? Has net profit been increasing over the past few years? Does the company's debt seem outlandish?

Investors will also want to take a look at the broader economy and see how a company stacks up against its competitors If they want to invest in businesses that stand out and have room for growth, especially in a crowded sector.

source: CNN