There has been increasing talk in the past few months about the stake’s high valuations and the potential for a stock market crash. I don’t know when the next crash will be. But there is one piece of advice from investment legend Warren Buffett that I will focus on this year if the market starts to sink.
Warren Buffett talks about the stock market crash
Buffett was born the year after the infamous Wall Street Crash of 1929. He has had many meltdowns since then that have affected his investing approach. In fact, in the 2008 collapse a number of leading companies including Goldman Sachs He looked to Buffett for large-scale cash payments.
So it’s no surprise that Buffett has a lot to say as an investor about the stock market crash. One wisdom that particularly interests me is Buffett’s famous saying that an investor should be “Be afraid when others are greedy and greedy while others are afraid“.
I think that sums up Buffett’s approach to responding to the stock market crash. At such a time, many investors fear. This can flood them with high-quality stocks at high selling prices. In such a situation, an investor who follows Buffett’s approach could be “GreedBuying good stocks at a cheap price.
What does greed mean?
But what exactly does Buffett mean by being greedy? To understand this, I think it’s helpful to know Buffett’s investment approach in general.
He doesn’t buy stocks just because they’re cheap. At one point in his career, this was his strategy and in fact he had great success with it. But he shied away from buying stocks he thought were cheap just because, say, their stock price was less than their net asset value. Instead, he moved on to buying companies he believed had the potential to generate high cash. Having identified these firms, he tries to buy them at an attractive price.
Dealing with a stock market crash
So when the stock market crashes and fear drives many investors, Buffett sees an opportunity.
These windows of opportunity can be short-lived. So I don’t think it’s a good moment to start searching the market for bargains. Instead, it is useful to make a shopping list of stocks one is interested in owning. Then, if a sudden crash occurs, it’s easy to look at the prices of those stocks and see if they offer good value.
So, for example, I like the potential income to be earned by the insurance company Legal and public affairs. I also love the well-established customer base of Howdens joinery. I’m calculating the pricing power of a beverage maker Diageo It could make it an attractive addition to my business as well. But other investors love these qualities, too. There is a risk that I may overpay for popular stocks relative to their potential future profits. I do not currently own any of these companies. But they are all on my watch list.
If there is a stock market crash, I will take a look at their prices. If I consider it attractive while beating the market, I will add it to my portfolio. Like Warren Buffett, I would take fear in the market as a signal to look for opportunities to build my own portfolio.
The post I’ve been following on Warren Buffett’s advice in 2022 first appeared in The Motley Fool UK.
Christopher Rowan has no position in any of the stocks mentioned. The Motley Fool UK recommended Diageo and Howden Joinery Group. The opinions expressed about the companies mentioned in this article are those of the author, and therefore may differ from the official recommendations we provide on our subscription services such as Share Advisor, Hidden Winners, and Pro. Here at The Motley Fool, we believe that thinking about a variety of ideas makes us better investors.
Motley Fool UK 2022