Editors' pick: Originally published Jan. 7.
George Soros has a net worth of $23 billion. His hedge fund averaged returns of 20% a year for decades. In short, Soros knows about financial markets.
That's why many investors are taking his recent warning so seriously. Here's what Soros has to say about financial markets today:
"When I look at the financial markets there is a serious challenge which reminds me of the crisis we had in 2008."
Global financial markets are primed to suffer another crisis. Oil prices are plummeting, Europe, the United States, and Japan have tremendous government debt burdens, and China is struggling.
To be a successful investor, you have to know what you can and can't control. You can't control when markets rise and fall. You can control your thinking and what you invest in.
With the global economy threatening another recession, there are three critical things you need to do to prepare.
1. Invest In Great "Recession-Proof" Businesses
Recessions can permanently destroy your wealth only if you invest in businesses that go bankrupt during the recession.
By investing in high quality businesses that tend to do well in all market environments, investors can minimize the fear that is associated with falling stock prices during bear markets.
This does not mean that great businesses do not see their stock prices decline during recessions. In general (and there are exceptions), even great businesses go on sale during market collapses.
Long-term investors should look at the underlying business rather than the stock price. Take Wal-Mart (WMT) as an example.
The company's earnings-per-share each year through the Great Recession are shown below:
- 2007 earnings-per-share of $3.16
- 2008 earnings-per-share of $3.42
- 2009 earnings-per-share of $3.66
For comparison, take a look at the earnings-per-share of the S&P 500 over the same time period:
- 2007 earnings-per-share of $75.20
- 2008 earnings-per-share of $16.89
- 2009 earnings-per-share of $56.33
Wal-Mart's business performed exceptionally well during the Great Recession, increasing earnings-per-share while the market was collapsing.
Thanks to its excellent business performance, Wal-Mart's maximum drawdown (worst price decline) was 26%, versus 55% for the S&P 500.
Wal-Mart did so well during the recession because it has a reputation for selling low-priced consumer products people need regardless of the overall economy. When times get tough, people look to save by shopping at discount retailers -- and Wal-Mart is the industry leader (by a wide margin) in discount retail.