Want to make a million in the next market crash? I'd follow Warren Buffett and buy bargain shares

Following Warren Buffett's lead and buying cheap shares after the next market crash could lead to high returns. It could even help you to make a million.

follow warren buffett when buying asx shares represented by business man's legs walking along

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

History shows that the next stock market crash is never too far away. Investor sentiment may have improved in recent months, but risks such as the US election and coronavirus could prompt a more challenging period for the stock market.

While this may cause some investors to worry, a market downturn can be an excellent buying opportunity. High-quality shares can trade at bargain prices. Buying them could boost your returns – just as it has done for Warren Buffett over recent decades. It could even improve your chances of making a million.

The next market crash

The next market crash could occur at any time. Risks such as further lockdown measures caused by coronavirus or political uncertainty in North America and Europe may or may not prompt the next bear market. However, since bull markets have never lasted in perpetuity, investors should expect the next bear market to never be too far away.

History also shows that buying cheap shares during bear markets can be a very profitable strategy for long-term investors. A market downturn generally causes a wide range of businesses to trade on valuations that are below their historic averages.

In some cases this is merited, such as where a company has a weak balance sheet or lacks a solid competitive position through which to generate improving financial performance. However, in other cases, a market crash causes weak investor sentiment towards the wider stock market that prompts low valuations among high-quality businesses. Over the long run, they are likely to recover. As such, buying them at low prices can produce high returns.

Following Warren Buffett's lead

Warren Buffett has often sought to capitalise on low prices when a market crash occurs. He has purchased a wide range of undervalued businesses that have economic moats when investor sentiment towards the stock market is relatively weak. Although this strategy has not always led to quick returns for Buffett, his long-term time horizon means that it has provided a significantly higher return than that available from indexes such as the S&P 500 Index (SP: .INX).

Even if you earn a similar return to that of the wider market, investing in a diverse range of shares can lead to a portfolio valued at over a million. For example, the stock market has produced an annual total return of around 8% over the long run. Assuming the same return on a $100,000 investment made today, or a monthly $750 investment, could lead to a seven-figure portfolio over a 30-year timeframe.

However, by waiting for buying opportunities in the next market crash, you could follow in Warren Buffett's footsteps and outperform the market. This may improve your financial outlook as the stock market recovers, and could reduce the amount of time it takes to make a million.

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.

More on Value Investing

A couple consider the pros and cons of taking out a loan
Value Investing

3 ASX stocks boasting better margins than Nvidia

Think you can't find Nvidia-like margins among Aussie shares... think again.

Read more »

Modern accountant woman in a light business suit in modern green office with documents and laptop.
Value Investing

Looking for ASX value shares? Here's 1 I'd buy and 1 I'd avoid!

It's not an easy exercise to identify which stocks are undervalued and which ones are simply terrible. Here's an example…

Read more »

a man with a wide, eager smile on his face holds up three fingers.
Value Investing

3 Australian value stocks to buy right now

I think these stocks are capable of beating the market.

Read more »

An ASX investor relaxes on her couch as the Harvey Norman share price drops due to the shares trading ex-dividend from today.
Opinions

Cheap and growing: The best bang for buck ASX shares I'd buy

Three companies that I believe are outstanding quality despite being thrown in the discount bucket.

Read more »

Value spelt out in orange on wooden blocks on top of each other.
Dividend Investing

7% and 6% dividend yields! 2 ASX value shares on my buy list

A number of quality ASX value stocks have faced recent headwinds as cost of living pressures begin to bite.

Read more »

a young boy dressed up in a business suit and tie has a cute grin and holds two fingers up.
Value Investing

2 ASX All Ords shares to buy delivering 'exceptional cash flows': fund manager

These stocks could be solid picks and pay big income too.

Read more »

Two happy shoppers finding bargains amongst clothes on a store rack
Value Investing

2 ASX 200 value stocks I'd have loved to buy in the August mini-crash

Here are two ASX value stocks that got mighty cheap during August.

Read more »

Value spelt out with a magnifying glass.
Value Investing

Here's how I'd invest $2,000 in ASX value shares right now

I’m going to talk about three different ideas that could be great value.

Read more »