Warren Buffett is known as the ‘Oracle of Omaha’ for a reason. He bought his first share when he was just 11 years old. Over the ensuing eight decades, he has built a career that eclipses everyone else’s in corporate America.
It may seem unlikely that someone with hundreds of billions of dollars could have anything in common with the average retail investor trying to save for retirement. But I believe that Buffett’s principles and investing philosophy are applicable to anyone looking to compound their wealth.
Here’s how thinking like Buffett can help you in your own investing.
Buffett has famously made some of his best deals during market crises. When everyone else is selling everything they own to meet their debts, Buffett’s Berkshire Hathaway is typically sitting on a pile of cash. Buffett and his partner, Charlie Munger, stand ready to buy up depressed assets. How is this applicable to someone looking to invest £2,000 in FTSE 100 stocks?
You need to understand the reasons why shares of otherwise quality companies tend to collapse in times of trouble. The first, and most obvious, reason is that investors generally panic. Even when a market crash is caused by a non-financial event like the coronavirus outbreak, there is still worry that some previously unknown systemic financial problem might rear its head.
Look out for forced liquidations
The second reason why good companies get hit in times like these is leverage. Many investors borrow to purchase stocks and bonds and other financial instruments, meaning they are leveraged. It is a high risk/high reward investment strategy. There are rules governing how much leverage an investor can have.
When the value of their holdings declines, investors can find themselves having too much leverage. Creditors have to issue what is called a ‘margin call’ – a demand to put up more collateral. Investors may find themselves having to sell shares of high-quality FTSE 100 companies just in order to meet their margin calls. These could be institutional investors with large positions, needing to sell in a hurry. This leads to the creation of bargain opportunities.
During the 2008 financial crisis, Buffett and Munger got great deals by bailing out major US banks like Goldman Sachs. It is unlikely that you will get to be in a similar position, to buy up significant positions in large financial institutions. However, you can certainly adopt their mentality and look for smaller bargain opportunities.
When everyone else is running for the hills, it really does pay to have some cash on hand. Berkshire Hathaway has upwards of $128bn (around £103bn) in cash ready to deploy. Although Buffett has yet to make any big buys in this crisis, I believe that it is only a matter of time before he does.
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Neither Stepan nor The Motley Fool UK have a 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.