Warren Buffett is known for his value stock investment approach. The billionaire investor’s long-term time frame has enabled him to generate strong returns for many decades.
This has come even during different recessions and market slumps over this time. So if the UK stock market takes a tumble later this year, here’s how I’m planning to imitate the great man.
Using cash wisely
One of the famous stories from the 2008 financial crash is that Buffett invested $5bn in Goldman Sachs, in order to help it have enough liquidity to survive the crisis. One of the reasons why he could do this was because he had cash on hand to deploy when an opportunity arose.
I need to manage my cash wisely in order to be able to do the same if we see another downturn. If I’m fully invested now and then a crash comes, I’m not going to be able to snap up some bargains.
Clearly, it’s a balancing act. If I hoard too much money now, it’s going to be heavily eroded by double-digit inflation. I need to put some of it to work, but want to leave a portion liquid.
Avoid shorting the market
Buffett has been quoted as saying to “never bet against America”. In the short term, the US stock market can fall. But the context of his quote was that over the decades and centuries that America has existed, it’s always been a losing bet to not think the stock market will rise.
I want to take this thinking with me and imitate it during a future market crash. I’d like to think Buffett would also comment to never bet against the UK! Sure, there will be problems to deal with in the short term, such as the current energy crisis. Yet if I look five or 10 years down the line, I can’t see this still being a problem.
On that basis, I’m going to avoid trying to short the stock market, to try and profit from a fall. I think it’s an unwise move and can result in large losses.
Buying value stocks like Warren Buffett
The final point I’d put into practice is to focus on buying value stocks during a slump. These type of firms are typically well-established, with the share price falling below the perceived long-term fundamental value. In theory, if I buy when it looks undervalued, I should be able to profit when the storm blows over and the market corrects.
Buffett has been successfully buying value stocks for many years. It has worked out well for him, so I don’t see why I’d not want to imitate it. Further, during uncertainty, I’d prefer to own value stocks than some riskier growth stocks. These typically perform worse during periods of stress.
Clearly, I don’t know if a crash is around the corner or not. But being prepared and having an idea of what I can do before and during that time is going to help me.
