The FTSE 100’s recent crash could provide a buying opportunity for value investors. Warren Buffett, for example, has been able to capitalise on bear markets throughout his career. This has been a contributing factor in him becoming one of the richest people in the world.
I think you can improve your portfolio’s performance in the coming years too. How? Through following his advice to buy when others are selling. And by focusing on high-quality businesses and holding them for the long term.
Greed vs fear
One of Warren Buffett’s most famous quotes is to “be greedy when others are fearful“. This means that you should seek to buy stocks when others are selling. There may be good reason for them to be fearful about the prospects for their holdings, of course. But you can capitalise on the cyclicality of the stock market through purchasing companies while they trade at low prices.
Certainly, it can be difficult to buy stocks after they have fallen heavily. For example, the FTSE 100 is down around 30% since the start of the year. But over time, the index has the potential to recover – just as it has done following previous bear markets. Through buying stocks when they are cheap due to weak investor sentiment, you can generate high returns in the long run.
Warren Buffett has always sought to buy companies with wide economic moats. This means businesses that have a competitive advantage compared to their sector peers. They may, for example, have a unique product, lower costs or a high degree of brand loyalty that affords them greater profit growth potential.
Through identifying those businesses with wide economic moats, you may be able to reduce your overall risk and improve your portfolio’s return potential. Such companies could experience stronger financial performance than their peers, thereby making them the most attractive stocks to buy at the present time.
As most people know, Warren Buffett is a long-term investor. His favourite holding period is, apparently, “forever“. As such, he does not concern himself with the short-term price movements of the stock market, and has never sought to make predictions about where stocks are heading over a period of months.
His focus is always on how his portfolio will perform in the coming years. This may mean that there are times when he experiences significant paper losses, as investors in the FTSE 100 have done over the past month. But over a period of many years, Warren Buffett has been able to generate high returns that have led to strong growth for his portfolio.
By adopting the same long-term approach and buying high-quality businesses with wide economic moats when other investors are selling them, you can generate high returns in the long run and take advantage of the FTSE 100’s recent decline.
Peter Stephens has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.