At 93 years-old, the Oracle of Omaha has gone through multiple stock market crashes throughout his investing career. Yet as disruptive as these periods can be for a portfolio, he’s always landed on his feet with more money in his pocket by the time the dust has settled.
When navigating choppy markets, following in the footsteps of experienced veterans can be a prudent move, especially for novice investors. With that in mind, let’s look at the three main strategies Buffett has deployed during periods of heightened volatility.
Focus on value, not price
It’s no secret that stock prices can change like the wind. With valuations driven by mood and momentum, all it takes is an overly pessimistic market to tank the value of a business. But this is only true in the short term. Given sufficient time, shares eventually move to reflect the intrinsic value of the underlying business.
This journey is rarely a straight line. And it’s easy to be spooked out of a position, especially when a stock market crash might be on the horizon. But at the end of the day, it’s the underlying businesses that ultimately push valuations up or down.
So, instead of focusing on what the stock might do, it’s smarter to analyse the company behind it. A firm with thriving operations is boosting its intrinsic value. And if the share price doesn’t follow, then a buying opportunity may have just emerged.
Capitalise on buying opportunities
Buying opportunities aren’t just created from booming businesses. Struggling enterprises can also make for interesting entry points.
When investor sentiment is in the gutter, the slightest bit of bad news can have a significant adverse impact on share price. That’s why, during a market crash, stocks often end up in freefall. But the question is whether such downward velocity is warranted.
For example, let’s say a semiconductor manufacturing enterprise has suffered a temporary power outage at its facilities and subsequently misses its earnings target. The shares will, more likely than not, react badly to this news. But while most investors are focused on the short-term quarterly performance, Buffett-like investors are more interested in what the coming years hold.
The manufacturing process has since resumed, demand remains high, and the order book hasn’t been impacted. As such, instinctive ‘sell’ reactions to bad news may have just provided a discounted entry point for patient investors.
Patience is key
Even after successfully capitalising on discounted UK stocks during a market crash, it could still be some time before a return on investment materialises. And with volatility reigning supreme, a seemingly cheap stock could get even cheaper.
Being a buy-and-hold investor largely consists of waiting around for others to catch up on my thinking. Providing a thesis is correct, this long-winded process can be exceptionally lucrative. It’s even made some investors billions.
However, even if an analysis is initially accurate, during the time it takes for others to realise the true intrinsic value of a company, something else might go wrong. If it’s another short-term hiccup, it might be time to increase the size of a position. But if a fundamental problem emerges, then the stock might not turn out to be a good investment after all. That’s why diversification is a critical tool for any investing journey, especially during a stock market crash.
