Over the last week, global stock markets have experienced a major crash. Here in the UK, the blue-chip FTSE 100 index just fell nearly 10% in the space of two days. In this kind of environment – where’s the panic in the air – I always come back to one well-known quote from investing guru Warren Buffett. He sees this type of stock market environment as a major buying opportunity.
A great tip
Over the last half century, Buffett has come out with some absolutely brilliant pieces of wisdom. There’s almost a great Buffett quote for every aspect of investing.
When stocks are in freefall and investors are in panic mode, however, it’s hard to beat this one:
I will tell you how to become rich. Be fearful when others are greedy. Be greedy when others are fearful.
His advice here is pretty clear. If you want to make a lot of money from stocks, the best time to buy is when others are fearful (like they are now).
Real-life examples
It’s worth noting that Buffett has made a lot of money following this strategy.
At the height of the Global Financial Crisis in 2008, for example, he invested $5bn in investment bank Goldman Sachs. This trade was rather complicated as it involved preferred shares and warrants, but he ended up generating a great return from it.
More recently, his investment company Berkshire Hathaway bought back a load of its own stock in the first quarter of 2020 (in the early stages of the coronavirus pandemic when markets were volatile). That trade worked out very well – over the last five years Berkshire Hathaway Class A shares have risen about 150% (roughly 20% per year).
So, I think this quote is worth remembering. Especially in the current environment, where a lot of investors are fearful.
Investing like Buffett
It’s worth pointing out that Buffett won’t invest in a company just because its share price has fallen. He has a very specific investment strategy.
In short, he likes to buy into high-quality businesses at reasonable valuations. Things he looks for in a company include a strong competitive advantage (or wide economic moat), a high level of profitability, a solid balance sheet, and a good track record when it comes to generating returns for investors.
The good news is that there are plenty of Buffett-type stocks that look appealing today. One example is, I think, Meta Platforms (NASDAQ: META), which owns Facebook and Instagram. I feel this company ticks a lot of boxes for those wanting to emulate warren Buffett’s investing style.
Not only is it very profitable and financially sound, but it also has competitive advantages and a great track record in terms of shareholder returns (the stock has risen more than 500% over the last decade).
In terms of the valuation, it looks reasonable to me after some share price weakness over recent months. Currently, the price-to-earnings (P/E) ratio is around 20, which isn’t high for a ‘Magnificent 7’ stock.
Of course, this stock isn’t for everyone. This social media company can be controversial at times and in the future, I wouldn’t be surprised to see it get more attention from regulators.
I do think it has potential from an investment perspective though. So it could be worth considering.
