As he approaches his 90th year on earth, Warren Buffett has successfully invested through some of the worst stock market crashes ever seen. 1987’s Black Monday? Been and gone. The 2008 financial crisis? A distant memory.
Any fool can make money when share prices are rising. What’s much more important is what the chairman and CEO of Berkshire Hathaway did so in volatile markets. As we approach spring 2020, fear and anxiety is everywhere.
“Asset prices are suggesting that a global recession is around the corner,” the manager of FTSE 100 fund Standard Aberdeen Life said on Tuesday.
So should investors sell everything, retreat to a bunker and don their tinfoil hats? Panic-buy tins of beans and toilet roll?
Do this instead
A decade ago, in the wake of the sub-prime mortgage-linked banking crisis, Warren Buffett said: “Opportunities come infrequently. A climate of fear is an investor’s best friend.”
Falling share prices do two things in particular. They reduce the overall value of an investor’s portfolio. But they also offer ways to buy great companies much more cheaply than was previously possible.
That’s reflected in how UK investors are piling into 8%- and 9%-yielding FTSE 100 shares at bargain prices.
Asset manager and ISA operator Hargreaves Lansdown reveals daily the top high-yield shares investors are buying. The following shares have a buy-to-sell ratio of 88% or more: leading insurers Aviva and Legal & General, energy giants BP and Royal Dutch Shell, and popular retail favourite Lloyds bank.
When taking into account their price-to-earnings ratios, some of these stable, super profitable companies are available at prices not seen in years.
And while in normal times income investors forgo the chance of serious share price appreciation for high-yield dividend payments, this time around you could have both. That’s big.
How to profit
Market declines should be viewed for what they are: some of the best buying opportunities, Warren Buffett says. Imagine getting the chance to go back in time 10 years and meet your past self. Which shares would you ask them to buy so you could dine out on the capital appreciation and dividend payments?
In his 2008 letter to Berkshire Hathaway shareholders Warren Buffett wrote: “This [market crash] does not bother Charlie [Munger] and me. Indeed, we enjoy such price declines if we have funds available to increase our positions.“
That last point is important. Don’t invest cash you can’t afford to lose. Or the money you need for your day-to-day expenditure like rent, or nursery or school bills or grocery shopping.
Most of us have probably seen the value of our Stocks and Shares ISA or SIPP fall in the last couple of months.
But the markets will rebound. And that’s why time in the market – not timing the market – is so important. Let compound interest do the work for you and you’ll likely enter the next decade much richer than you started.
I’ll leave you with one last Warren Buffett nugget of wisdom.
“In the 20th century,” he said, “the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.” All these things shall pass. You may as well profit.
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Tom Rodgers owns shares in Legal & General and Aviva, but not BP, Lloyds Banking Group or Royal Dutch Shell. The Motley Fool UK has recommended Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.