Warren Buffett has previously invested money following a market crash to great effect. It has enabled him to buy high-quality companies at prices that undervalue their future prospects.
His strategy works because he is content to hold large amounts of cash ready to invest in a market decline. He also takes a long-term view of his investments, and seeks to buy businesses with wide economic moats.
Clearly, the timing of the next market crash is a known unknown. However, planning for it now could be a means of improving an investor’s prospects of making a million.
Warren Buffett’s willingness to hold cash
Warren Buffett holds a significantly greater proportion of cash within his portfolio than is the case for many other investors. Yes, this means lower returns when stock markets are rising. But it also gives him the opportunity to capitalise on low valuations when they come along. And with a market crash often being of short duration, access to large amounts of liquidity can help an investor to take advantage of temporarily cheap stock prices.
With interest rates currently low, holding a substantial amount of cash may reduce an investor’s overall returns in the short run. However, the low valuations often available in a market decline may mean it is worth accepting a lower return in the short run. It could offer greater scope for capital appreciation over the long term.
A patient stance regarding the prospect of a market crash
Warren Buffett also takes a patient approach when managing his portfolio. This means he is unconcerned about when a market crash will happen, or how long it will take for the stock market to recover. As a result, he is content to wait for the best opportunities to come along. Should there be none at a particular point in time, he is happy to wait. One day, shares in high-quality companies will trade at lower prices.
Looking ahead, it is unclear when the next market crash will occur. However, the past performance of the stock market suggests a downturn is always set to take place in the long run. Waiting for it in order to buy high-quality stocks at cheap prices could be a profitable long-term move.
Seeking economic moats
Warren Buffett has previously purchased companies with wide economic moats. This means a competitive advantage over their peers that can lead to higher profits in a variety of market conditions. Through purchasing businesses with advantages such as strong customer loyalty and a unique product, it may be possible to generate relatively high returns in the next market crash.
Even if an investor matches the stock market’s long-term return of around 8% per year, a £100,000 investment today would be worth over a million within 30 years. However, by holding cash for better opportunities, having a patient approach and buying stocks with wide economic moats, it may be possible to obtain a higher return over the long run.
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.