Despite the stock market volatility this year, billionaire investor Warren Buffett has been on quite a shopping spree. In the third quarter of 2022 alone, his firm, Berkshire Hathaway, injected an additional net $3.6bn into equities. And when combining all his activities over the last nine months, he hasn’t been this prolific a buyer of stocks since the 2008 financial crisis!
The ‘Oracle of Omaha’ has repeatedly said to be “greedy when others are fearful”. And that’s a mantra he’s following to a tee. Buffett knows through decades of experience that buying top-notch, undervalued businesses can unlock massive long-term wealth. In his case, it’s around $109bn!
Buying gold may seem like a wise move right now as a shelter against volatility. But as Buffett has demonstrated, buying cheap shares could be the far smarter move in the long run, despite the heightened short-term risks.
Cheap isn’t always a bargain
Simply buying shares in businesses beaten to a pulp this year isn’t exactly prudent investing. After all, plenty of stocks have been sold off for good reasons. For example, their debts may have reached unsustainable levels, management’s strategy could be flawed, or their products are simply not in demand.
Regardless of the reasons, buying shares in a defective company is the equivalent of setting money on fire.
However, not every sold-off stock in 2022 falls into this category. When volatility is high, most investors make decisions based on emotions rather than logic. Uncertain industry conditions could be creating short-term disruptions that are hampering growth. Or weak economic outlook could be creating a period of reduced consumer demand. Yet, the long-term potential of an affected business might remain intact.
These are the cheap shares Buffett is always on the lookout for. The short-term performance of such stocks may end up being lacklustre. But in the long run, these temporary headwinds will eventually dissipate, allowing these enterprises to get back on track, eventually sending their share prices surging.
That’s why investing in the stock market today and capitalising on the low prices could drastically improve investors’ long-term financial prospects.
Buffett’s strategy vs gold
Investing in the stock market always carries risk. Even buying high-quality, cheap shares can backfire if another unpredicted external force is thrown into the mix. This creates a lot of uncertainty that not every investor is comfortable dealing with. And it’s why gold is such a popular asset class during economic volatility.
The defensive commodity has a fairly solid track record of providing protection against inflation while simultaneously providing stability. But while it’s a solid investment choice for those seeking to protect wealth, it’s pretty useless at creating it.
Unlike a business, gold doesn’t generate cash flow. It’s merely a store of value. And that’s the main reason why Buffett has no interest in it, especially when the stock market is throwing a tantrum and creating rare buying opportunities.
Therefore, while the risk is higher, following Buffett’s advice and buying a portfolio of cheap, high-quality shares could be more prudent for investors seeking to improve their long-term financial position.
