A second stock market crash could realistically occur in the coming months. A number of risks continue to weigh on the outlook for the world economy. They include November’s US election, coronavirus and political instability in Europe.
As such, following Warren Buffett’s advice in today’s stock market could be a sound move. His focus on buying cheap, high-quality stocks may reduce your losses in the short run. Meanwhile, copying his long-term horizon could allow you to benefit from a likely recovery in share prices.
Buying cheap stocks
Cheap shares may be less negatively impacted by a stock market crash than companies that are trading on excessive valuations. Their prices may already take into account the potential for weaker economic growth. As such, investors who hold undervalued shares today may experience lower levels of loss in a future market downturn.
Although many stocks have rebounded in recent months after the previous market decline, a number of businesses continue to trade at prices that are significantly below their historic averages. Buffett has always sought to purchase companies when they offer wide margins of safety.
Doing likewise could be a good strategy to protect your portfolio’s value. It’s also important to be practical at the present time, given weak investor sentiment towards a wide range of sectors.
The appeal of high-quality companies in a stock market crash
Stronger businesses may also be less impacted by a second stock market crash. For example, companies that have strong balance sheets and solid market positions may be viewed more positively by investors. They may also be able to deliver more resilient financial performances than their sector peers in what could prove to be a tough period for the economy.
Buffett has always focused his capital on the best businesses he can find. He often buys companies with wide economic moats. This is essentially a competitive advantage, such as a unique product or a strong brand that differentiates one business from its peers.
It can lead to a company commanding a higher valuation over the long run. And that translates into superior share price performance relative to the wider industry and stock market.
A long-term view
Surviving the next stock market crash may be a priority for many investors at the present time. However, a downturn in stock prices can present numerous buying opportunities when high-quality businesses trade at low prices for a short amount of time.
Therefore, using it to your advantage rather than seeing it as a problem could be a profitable move. Buffett has previously used this tactic to gain an advantage over other investors. Doing the same may improve your long-term portfolio returns and boost your financial prospects as the stock market gradually recovers.
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Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
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