Billionaire investor and Warren Buffett's partner at Berkshire Hathaway, Charlie Munger, told the Daily Journal's annual meeting earlier this year that the markets are in for "significant trouble". That prediction is a little more relevant now with the risk of recession back on the horizon, so let's take a look at how to make money during this difficult period.

Charlie Munger predicts trouble in the stock market

The conclusion from Charlie Munger's remarks in light of current macroeconomic and market conditions is that future SPY returns are likely to be below average over the next few years. The reasons are fairly simple:

• The outlook for economic growth is weak, if not negative, for the foreseeable future. Without strong economic growth, earnings growth will also be weak.
• Interest rates are likely to rise further based on persistently high inflation and recent comments from the Federal Reserve. Higher interest rates in the near term will make the market appear overvalued under the current interest rate model. Higher interest rates will also impact asset valuations and drive them lower.
• Valuation multiples are still elevated compared to historical averages. Warren Buffett's favourite market indicator is almost 150%, signalling that weakened US equities are still overvalued and at risk of further declines. Buffett's indicator is based on the total market capitalization of all actively traded U.S. stocks and divides it by the most recent quarterly estimate of gross domestic product (GDP). Buffett suggested in a 2001 article for Fortune magazine that stocks would be fairly valued if the indicator were at 100%, suggesting that they are still significantly overvalued today. Buying stocks would "probably work very well" at 70% or 80%, but around the 200% mark it would be "playing with fire," he wrote at the time.

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As a result, when you combine weak growth with a lack of multiple expansion (and in fact a likely reduction in multiples), low dividend yields, and a likely rise in interest rates, there are no real catalysts to drive stock market returns.

Charlie Munger's thoughts on inflation

Inflation plays essentially no role in Munger's investment strategy. The billionaire investor largely ignores current macroeconomic trends when making investment decisions.

"I'm always aware of it, but it doesn't stop me from functioning," he said. "I'm 98 and a half years old and I've seen a lot of inflation. I intend to outlive inflation. I've seen a lot in my long life. It doesn't discourage. "I don't pay much attention to macroeconomic trends," he said. "Like the weather, I ignore the weather. I just try to invest whatever capital I have as best I can. I just take whatever opportunities I can and hopefully get my share."

How to invest during a recession

While these are certainly difficult, if not extremely challenging, times for investors trying to navigate the markets, it still makes sense to be invested. However, we should keep in mind the following principles to guide us to be more cautious during this period:

• Think rationally. When investing, you will sometimes experience setbacks, confusion, frustration, uncertainty, anxiety and disappointment. It's inevitable. How you react to events and to your emotions will be a key factor in your success or lack thereof. At the heart of a rational approach to investing is a framework built on three factors: balancing exposure to risk factors, effective diversification, and taking advantage of relative mispricing in financial markets.
• Invest with a long-term time horizon, because long-term investing gives your money the best chance of increasing in value. But this means keeping calm during periods of significant stock market volatility - and remembering that, as history shows, markets usually recover.
• Invest in quality companies. Quality companies are those that deliver high profitability over the long term, and whether that profitability is measured as return on equity, return on assets, return on invested capital or whatever profitability you want to use. Other definitions of quality that we can intersect with are quality in the sense of low leverage or "safety" and quality in the sense of high management investment relative to earnings (indicating that management is investing in future growth).

Value investing will always be relevant

According to Munger, value investing will never die. This investment strategy is based on selecting stocks that appear to be trading at a lower price than their intrinsic or book value. Value investors actively seek out stocks that they believe are undervalued by the stock market. They believe that the market overreacts to good and bad news, resulting in stock price movements that do not match the company's long-term fundamentals. Overreaction offers an opportunity to profit by buying shares at discounted prices.

DISCLAIMER: All information contained herein is for informational purposes only and is in no way an investment recommendation. Always do your own analysis.