In recent days we’ve witnessed broader markets both in the UK and globally crash. However, instead of panicking, now would be a good time to take a deep breath and assess the situation. In these uncertain times, it may help to see how professionals, such as legendary investor Warren Buffett, approach a brutal market sell-off.
Buffett’s track record
In February, Buffett released his annual letter to shareholders of Berkshire Hathaway, his firm that has the most expensive share price of any company in history. In 1964, each Class A share was just shy of $20. Today it’s upwards of $272,000 (no, that’s not a misprint).
Put another way, Buffett has been making on average 20% a year. No wonder he’s regarded as one of the best investors in history.
Therefore I believe most of us can benefit from his wisdom and decades of experience in the markets. And many regard his shareholder letter as one of most important documents published each year for investors.
Buffett firmly believes that stocks outperform all other asset classes over the long term. However, he’s not one to buy shares in a company at any price. Indeed, the Oracle of Omaha is regarded as the king of value investing.
Although Buffett is bullish on stocks long term, he said “that rosy prediction comes with a warning: Anything can happen to stock prices tomorrow”.
He regards the stock market as unpredictable. Large price swings are quite normal. And within days of this warning, markets globally did indeed crash. On 12 March, the FTSE 100 index plunged 11%.
Buffett does not worry
However Buffett doesn’t think there’s any need for worry for the individual who doesn’t use borrowed money and who can control his or her emotions. To him, if you’re not thinking of owning the stock you’ve just bought for at least a decade, don’t even think of owning it for a day.
Therefore, falling prices don’t make him nervous because he has seen equity markets recover time after time. Instead he patiently waits.
One of my favourite Warren Buffett quotes is “opportunities come infrequently. When it rains gold, put out the bucket, not the thimble“. In other words, he’d recommend buying stocks as prices decline.
According to Berkshire Hathaway’s most recent quarterly filing, the groups holds a record $128bn in cash and US Treasury bills. Thus management has been in a liquid position to buy shares that offer value. I’d imagine he’s now getting his shopping list out.
Similarly, retail investors would benefit from having some cash saved to buy quality stocks, especially when prices take a hit.
Preferred industries
Buffett’s preferred investments are
- Big or even mega-cap stocks
- Financials, including banks and insurance companies, followed by large consumer brands
- Stocks that pay dividends
Although his main holdings are US-based stocks, the FTSE 100 offers plenty of choices in which he’d have possibly considered investing had he been UK-focused. And if I were to take Buffett’s approach, I’d be now willing to invest in many of these solid companies, especially as their valuations have fallen. Here’s a shortlist for you to do further due diligence:
- Aviva – dividend yield 11.2%
- BP – dividend yield 11.9%
- GlaxoSmithKline – dividend yield 5.7%
- HSBC Holdings – dividend yield 9.1%
- Legal & General Group – dividend yield 5.8%
- National Grid – dividend yield 5.7%
- Persimmon – dividend yield 10.9%
- Standard Life Aberdeen – dividend yield 10.5%