The stock market crash in the spring was just the kind of time to buy quality shares at lower prices.
Warren Buffett is known for buying shares in good-quality businesses when the market is marking down the price. And lower share prices often go hand in hand with temporary operational difficulties in the underlying business. Stocks also tend to offer lower valuations when the general economic outlook is cloudy.
How to be ready for a second stock market crash
Buffett’s strategy has proved to be so successful over the years because the businesses underlying his stocks often go on to recover well. But to increase the chances of that happening, he has a strong focus on the quality of the enterprise. That’s why he sold his airline stocks in this crisis. It’s clear from his earlier writings in his Berkshire Hathaway shareholder letters that he regards airline businesses as weak and of poor quality.
As well as looking for quality, another key part of his strategy is to invest with a long holding period in mind. It often takes time for operations to recover and move share prices higher. And on top of that, value can build year after year in an enterprise as it expands and profits increase. To me, the best way to approach investing is to search for stocks to hold for years and decades rather than for weeks and months.
Despite the recent bounce-back for many shares, there is still some good value about if you choose carefully. But perhaps one of the best ways to proceed with a programme of investment is to build up a watch list of quality shares that you’d one day like to own. After carrying out your research and due diligence, you’ll be well prepared and ready to pounce if the markets plunge again. After all, many people have been talking about the possibility of a second stock market crash soon.
Overcoming emotional resistance
If there’s a second crash you’ll be in a strong position to shop for shares when you’re armed with your prepared watch list. Emotionally, it can be hard to think about buying shares when you’re being bombarded with bad economic news. Yet shares purchased in troubled times can often end up being some of our best investments.
One method that helps me come to terms with buying cheaper shares is to think of the shop analogy. We cheer lower prices for quality goods in the sales and snap up the bargains. And if I think of cheaper (but quality) shares in the same way I think of marked-down goods, it helps me to have the confidence to buy stocks.
Warren Buffett is still working at 90 years old because he loves the activity of researching and buying companies and shares. But I reckon following his investing strategy and investing as he does can help most investors get rich and retire early if they work hard at it.
Kevin Godbold has no position in any share mentioned. The Motley Fool UK owns shares of and has recommended Berkshire Hathaway (B shares) and recommends the following options: short September 2020 $200 calls on Berkshire Hathaway (B shares), long January 2021 $200 calls on Berkshire Hathaway (B shares), and short January 2021 $200 puts on Berkshire Hathaway (B shares). 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.