Warren Buffett has an exceptional track record of outperforming the share market over a long time period. Buffett's investing strategy aims to buy high-quality companies when they offer wide margins of safety, and hold them over the long term.
As such, it could be a useful strategy for investors to adopt as a means of benefitting from the recent market volatility. It may not produce high returns in the short run, but could significantly improve your financial prospects over the coming years.
Warren Buffett's investing strategy
One of the most notable aspects of Warren Buffett's investing strategy is its simplicity. He does not use a plethora of complicated formulas in deciding when or where to invest. He simply seeks to buy stocks when they are trading at attractive prices. This method allowed him to buy a range of companies following the last global recession in 2008/09. Many of those holdings produced high returns as the world economy recovered.
With many stocks currently trading on low valuations, using a value investing strategy could improve your long-term returns. It may enable you to take advantage of the cyclicality of the stock market, and generate high returns during its likely recovery.
Economic moats
As well as seeking to buy stocks when they offer wide margins of safety, Warren Buffett also seeks to purchase companies with economic moats. An economic moat is essentially a competitive advantage that one company has over its sector peers. Examples include a lower cost base, a unique product or strong customer loyalty. These help to protect a company's financial performance during a downturn and deliver relatively high profitability during economic growth.
At the present time, a number of companies with wide economic moats are trading on low valuations. Therefore, investors have a significant amount of choice. Choice in building a diverse portfolio of companies that produce relatively high returns in the long term.
Holding period
Warren Buffett's investment strategy also seeks to hold stocks for the long term. In fact, his favoured holding period is apparently 'forever'.
This attitude could be beneficial given the current outlook for the world economy. A global recession seems highly likely this year. And it could take place over a sustained time period depending on monetary policy, fiscal policy and whether there is a second wave of the coronavirus.
As such, investors who are able to take a long-term view of their holdings could be among those who generate the highest returns. They may be able to overcome short-term market volatility to benefit from the eventual recoveries of their holdings.
Although this may not lead to a portfolio size which rivals Warren Buffett's, it could, nevertheless, boost your returns in the long run.
