Warren Buffett has a long track record of capitalising on stock market downturns. As such, it could be a good idea for investors to follow his advice at a time when the prospect of a second market crash appears to be relatively high.
The ‘Sage of Omaha’s’ long-term approach and focus on high-quality companies may help him in identifying the best investment opportunities while other investors are selling stocks. Over time, this may lead to market-beating returns.
Warren Buffett’s long-term approach
Warren Buffett’s time horizon is exceptionally long. In fact, his favoured holding period is rumoured to be ‘forever’. As such, he is unlikely to become too concerned about a temporary decline in stock prices. Although a market crash may feel as though it could last in perpetuity, the reality is that no market downturn has ever continued without eventually becoming a bull market.
Therefore, adopting a long-term view may help an investor to look beyond short-term chaos in order to purchase the best companies on offer. Certainly, it is extremely difficult to know when a market downturn will come to an end. However, indexes such as the FTSE 100 Index (FTSE: UKX) and S&P 500 Index (SP: .INX) have always recovered from their declines to post new record highs. Investors who purchase undervalued stocks and hold them for the long run therefore stand a good chance of generating impressive returns as the economy recovers.
If Warren Buffett instead took a short-term view of his portfolio, he would not be in a position to take advantage of a market crash. Instead, he would probably react to short-term market movements. This could lead to losses because of the unpredictable nature of stock prices over a short time horizon.
Buying high-quality stocks
Warren Buffett also buys high-quality companies in a market crash. They are more likely to overcome potential economic challenges and weak operating conditions than their peers. This may be because they have a more solid financial position or a clear competitive advantage, for example. Furthermore, they may also be better placed to benefit from a likely long-term recovery. They may have a unique product, a dominant market position or lower costs than their sector rivals that allow their bottom lines to move higher at a faster pace.
Through owning the most attractive businesses within a sector, an investor’s risks may be lowered and their return prospects could be improved. Therefore, it may be worth analysing companies within a specific sector to unearth the most attractive purchases that can deliver the highest returns in the long run.
Warren Buffett has previously engaged in relatively few purchases even during a market downturn. Therefore, it may be prudent to be selective when deciding which companies to purchase. Doing so may lead to a better portfolio performance and a stronger recovery as the economy returns to positive growth in the long run.