The UK is currently facing the biggest period of political and economic uncertainty for many, many years. Therefore, it’s difficult for investors to know how to react and what investors’ next moves should be. In such a situation, it can help to consider how some of the most successful, experienced and wise investors may react in such a situation. And in this sense, there’s nobody more qualified than Warren Buffett.
Perhaps the key takeaway from Buffett’s career is his ability to stay calm when other investors around him are panicking. For example, during the credit crunch when the S&P 500 was falling through the floor, Warren Buffett was the man who invested heavily in banking stocks. Similarly, in the mid-1970s when the outlook for the global economy was uncertain to say the least, Warren Buffett famously said when asked about his view on stocks that he “felt like an oversexed guy in a harem… This is the time to start investing.“
Uncertainty ahead
Today, a similar level of uncertainty is present due to the UK’s political and economic outlook. We’ll soon have a new Prime Minister and while Theresa May is odds-on favourite, previous Conservative Party leadership elections have thrown up surprises, with David Cameron starting as anything but the favourite in 2005. Therefore, there are likely to be numerous twists and turns and even when a new Prime Minister is elected, there’s great uncertainty about the deal that will eventually be negotiated with the EU.
Similarly, the UK economy is enduring a highly uncertain period. So much so that the Bank of England is now contemplating a more dovish stance on monetary policy, with interest rate cuts and quantitative easing back on the table for implementation over the coming months. Although a recession is by no means guaranteed, few investors would be surprised if this took place and caused UK-focused shares in particular to come under pressure.
Cash on hand
This is a situation in which investors like Warren Buffett would thrive. First and foremost, they would be likely to make sure there’s sufficient cash on hand to take advantage of falls in the value of shares. Although a number of sectors have already fallen, the sheer scale of the uncertainty yet to come could cause renewed declines in the valuations of UK-listed (and especially UK-focused) stocks. Therefore, making sure you have cash on hand could be a sound move to make.
Investors such as Warren Buffett would then be likely to select companies that offer a wide margin of safety, sound financial standing and a clear strategy through which to not only survive any economic turmoil, but to benefit from it relative to their peers. Buying such stocks could lead to stunning gains in the long run, although they may be subject to short-term volatility and even significant paper losses.
The fact is, investors such as Warren Buffett take the long-term view. And the reality is that to make sky-high profits in shares you must buy when few others are interested in doing the same. Brexit could create such a situation and it could therefore be a golden age of buying for long-term investors.