The COVID-19 coronavirus outbreak is a disturbing turn of events. On a human level, I find it very upsetting. But I’m certain this is one of those times that Warren Buffett will see opportunities in the stock market.
The crisis has the potential to plunge the world into a general recession or economic slump. I think that’s what the stock market has been telling us recently. However, share prices often behave as a leading indicator. By the time we reach the bottom of any economic downturn, it’s likely that share prices will have been rising again for some time.
Searching for quality selling cheap
Indeed, the stock market will be looking ahead, and when the economic news flow is at its worst, the major market indices will probably be well up from their lows. You could end up wondering how you missed the boat! And that’s why you’ll read many articles on The Motley Fool urging you to consider buying shares right now. If you wait until the news is all rosy again, you’ll likely miss the best opportunities to bag the shares of quality businesses while they are selling at a discount.
And it’s a good idea to buy such discounted ‘merchandise’. Two things can propel your returns from shares. The first is ongoing operational progress in the businesses behind your stocks. And the second is a valuation re-rating upwards from the stock market.
When times are tough and the general economic outlet is murky, such as now, the stock market tends to compress valuations. To extend my earlier analogy, the merchandise gets marked down. And when the general economic sun is shining and there isn’t a cloud in the sky, the price of the merchandise tends to creep up.
Market dynamics like that are one of the reasons Warren Buffett’s long-term investing record is so good. He’s known for going out shopping for shares when those representing quality companies have been marked down. Yet, to do that, he’s had to go out in bad economic weather and times of macroeconomic crisis. But his focus on the underlying quality of an enterprise has served him well over the years.
Both active and passive can work well
In his 2019 letter to the shareholders of Berkshire Hathaway – the conglomerate he controls – Buffett points out that the per-share market value of the business has increased by 2,744,062% since he started running it in 1965. His investing methods clearly work well! And I think it’s worth studying his investment approach with the aim of building your own Buffett-style fortune in shares.
But if you haven’t got the time or inclination to work hard at investing, there’s more good news in Buffett’s letter. Over the same time period that he was building up Berkshire Hathaway, he reckons the S&P 500 index has delivered a return of 19,784% with dividends reinvested along the way.
So I think investing regularly in low-cost index tracker funds could also prove to be a decent path to success in the markets. Good luck on your investing journey!
