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 often the case among other investors. Although this means lower returns when stock markets are rising, it provides him with the opportunity to capitalise on low valuations when they come along. And, with a market crash often being short in nature, having access to large amounts of liquidity can allow an investor to take advantage of temporarily cheap stock prices.
With interest rates currently at low levels, holding a substantial amount of cash may reduce an investor’s overall returns in the short run. However, the low valuations that are often available in a market decline may mean that it is worth accepting a lower return in the short run to obtain 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 that he is unconcerned about when a market crash will occur, 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 they be unavailable at a particular point in time, he is happy to wait for shares in high-quality companies to 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 to take place 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 is essentially a competitive advantage over their peers that can mean 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 become 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.
Where to invest $1,000 right now
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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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