The risk of a second stock market crash may be causing some investors to sit on the sidelines and await greater clarity in the prospects for the global economy. However, it is during the riskiest periods for the stock market that the best investing opportunities can come along.
As such, using the value investing strategy of Warren Buffett could be a profitable move. It may enable you to invest today and generate high returns in the coming years.
A second market crash
The previous performance of the stock market suggests that a second market crash would not be a major surprise. There are still many risks facing investors that have the potential to cause a fall in investor confidence, as well as to weaken the operating environments across a wide range of industries.
Risks include a continued rise in the number of coronavirus cases, possible difficulties in the upcoming United States election, and a continued stalemate in Brexit talks. Any of those risks, as well as a great many others, could cause a fall in stock prices that undoes all of the gains made over recent months during the market rebound.
Value investing in an uncertain market
The prospect of a second stock market crash may naturally cause some investors to become fearful. They may worry about the potential for paper losses over the near term that damage their wealth, albeit on a temporary basis.
Other investors, such as Warren Buffett, view falls in stock prices as opportunities to buy cheap stocks as opposed to threats to their long-term wealth. Through having a value investing focus, you can buy the most attractive stocks available when they trade at wide discounts to their intrinsic value.
The opportunities to do so often coincide with the riskiest periods from an economic perspective. However, with no bear market or global recession having ever lasted in perpetuity, long-term investors who buy a diverse range of undervalued shares are relatively likely to enjoy impressive returns from their recovery.
Starting to invest in undervalued shares today
While the potential for another market crash may dissuade some investors from buying shares today, many stocks appear to offer wide margins of safety. This could mean that the stock market has factored in many of the risks they face, and that they offer attractive risk/reward opportunities.
Therefore, now could be the right time to start building an equity portfolio. Through focusing your capital on high-quality businesses with strong balance sheets and wide economic moats, just as Warren Buffett has done throughout his career, you could enjoy high returns in the long run. Doing so may not make you a billionaire, but it could enhance your financial future and help you to enjoy a greater degree of financial freedom in the coming years.
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Motley Fool contributor Peter Stephens has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
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