Warren Buffett, one of the greatest investors in the world, has just turned 90. He’s always liked building wealth by investing in a market crash.
Buffett hasn’t made many buys following this spring’s crash, to the surprise of many. However, news agencies announced that the Oracle of Omaha recently invested in a bunch of Japanese companies. I think Buffett believes another stock market crash will happen soon.
Right now the famous Buffett indicator is near its record highs. In plain terms, it means the stock market is worth much more than GDP. This is particularly obvious in the case of the US. In addition, there’s plenty of uncertainty still about Covid-19. Consumption levels all over the world are still quite low due to the current economic crisis. Plus, there are other dangers that could also lead to a stock market crash, including US-China relations and the US elections.
So, I believe a market crash is coming. That’s why I see these pieces of advice from Buffett as particularly relevant right now.
Tips from Warren Buffett
1. Think long term
To start with, the Sage of Omaha always invests for the long term. It might sound too simple. But there is a strong logic behind this approach. If you invest in a company with a high credit rating and a strong business model, you’re making a smart move. The company you buy should be profitable and keep paying dividends. You can reinvest these dividends and buy some more of these shares at every possible pull-back. In this situation, you’re highly unlikely to lose money. But if, for some reason, this company isn’t particularly popular among investors right now, don’t panic!
Buffett put it this way: “Nobody buys a farm based on whether they think it’s going to rain next year. [They] buy it because they think it’s a good investment over 10 or 20 years”. This brings us to the next tip.
2. Ignore market moves
These days we are seeing a high-tech rally. With all of us staying at home, we are naturally interested in e-commerce, cloud technologies, video games, and various subscription services. This gives a boost to companies like Amazon, Netflix, Zoom, and Microsoft. On the other hand, some companies with long operational histories are down this year so far.
According to Buffett, “Though markets are generally rational, they occasionally do crazy things. [Investors need] an ability to both disregard mob fears or enthusiasms and to focus on a few simple fundamentals… A willingness to look unimaginative for a sustained period — or even to look foolish — is also essential”. In other words, “don’t watch the market closely”.
3. Buy index funds
In order to minimise the risks, it’s wise to invest in an index fund. Buffett always recommended buying a fund tracking the S&P 500 Index. But UK investors can get a very similar result by investing in the FTSE 100 Index. It would allow them to spread the risks and take advantage of the stock market recovery.
Anna Sokolidou has no position in any of the shares mentioned. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK owns shares of and has recommended Amazon, Microsoft, Netflix, and Zoom Video Communications and recommends the following options: long January 2021 $85 calls on Microsoft, short January 2021 $115 calls on Microsoft, short January 2022 $1940 calls on Amazon, and long January 2022 $1920 calls on Amazon. 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.