Warren Buffett has an exceptional track record of outperforming the stock market over a long time period. His value investing strategy aims to buy high-quality companies when they offer wide margins of safety, and hold them over the long term.
As such, it could be a useful strategy for investors to adopt right now as a means of benefiting from the recent market crash. It may not produce high returns in the short run, but could significantly improve your financial prospects over the coming years.
Warren Buffett’s strategy
One of the most notable aspects of Warren Buffett’s investing strategy is its simplicity. He does not use a plethora of complicated formulas in deciding when or where to invest. He simply seeks to buy stocks when they are trading at attractive prices. This method allowed him to buy a range of companies following the last global recession in 2008/09, with many of those holdings producing high returns as the world economy recovered.
With many stocks currently trading on low valuations, using a value investing strategy right now could prove to be a worthwhile means of improving your long-term returns. It may enable you to take advantage of the cyclicality of the stock market, and generate high returns during its likely recovery.
Economic moats
As well as seeking to buy stocks when they offer wide margins of safety, Warren Buffett also seeks to purchase companies with wide economic moats. An economic moat is essentially a competitive advantage that one company has over its sector peers. Examples include a lower cost base, a unique product or strong customer loyalty that helps to protect a company’s financial performance during a downturn and helps deliver relatively high profitability in a period of economic growth.
At the present time, a number of companies with wide economic moats are trading on low valuations. Therefore, investors have a significant amount of choice through which to build a diverse portfolio of companies that produce relatively high returns in the long term.
Holding period
Warren Buffett also seeks to hold stocks for the long term. In fact, his favoured holding period is apparently ‘forever’.
This attitude could be beneficial given the current outlook for the world economy. A global recession seems likely this year, and could take place over a sustained time period, depending on factors such as monetary policy, fiscal policy and whether there is a second wave of coronavirus.
As such, investors who are able to take a long-term view of their holdings could be among those who generate the highest returns. They may be able to overcome short-term market volatility to benefit from the eventual recoveries of their holdings.
Although his may not lead to a portfolio size that rivals that of Warren Buffett, it could nevertheless boost your returns in the long run.