I think Warren Buffett’s advice that investors should be “fearful when others are greedy and greedy when others are fearful” comes the closest to encapsulating how the Oracle of Omaha thinks about investing in one line. Buffett seeks to buy shares in businesses for less than they are worth. But it would be a mistake to assume that he tries to time the market.
Buffett no doubt seeks to capitalise on market crashes by buying good shares cheaply. But, since he has said that his favourite holding period is “forever“, he is not looking to cash in just because the market has boomed either.
Does Warren Buffett think a market crash is coming?
Where am I going with this? Well, I have seen a lot of commentary lately about Buffett fearing a market crash is coming, based on an analysis of what he is doing with his Berkshire Hathaway portfolio. In particular, a purchase of 20m shares in Barrick Gold in the second quarter of 2020 attracted attention. For one thing, Buffett has frequently expressed his distaste for gold as an investment. Also, the gold price often rises when markets crash. Thus the interpretation has been that Buffett might be fearing another crash.
I have an alternative interpretation. Barrick mines gold and sells it for cash. It’s a business, and its shares fell in the market crash. Buffett probably thought those shares were cheap, and that’s why he bought them. This was also just a 0.28% portfolio position in Barrick, not the kind of size that will make a material difference whatever the market does.
I could also point to the position in an S&P 500 tracker ETF that has been maintained at the same size in Berkshire Hathaway’s portfolio throughout the course of this year. That does not suggest Buffett is fearful of another market crash. Also, the portfolio’s biggest holdings in Apple, Bank of America, and Coca-Cola have been either maintained or increased through the course of the year so far. None of this suggests Buffett thinks the markets are going to crash again.
Time in the market
Unless Warren Buffett has radically changed his investing style, then I don’t think he is looking to anticipate market crashes. As I understand it, Buffett looks to buy good businesses on the cheap and ideally hold them forever. When stock markets are depressed, there are bargains to be had. If I were trying to emulate Buffett’s investing style, I would be looking for bargains at the moment, and not worrying about crashes.
Relx is a stock I bought after the market crash. I think it’s a great company, with a wide economic moat. Its share price has still not recovered completely, so I have continued buying. If markets wobble and Relx shares tumble again, I can get even more of them for my money.
Market crashes don’t last forever. In the long term, I think my Relx shares will be worth much more than they are now, in part because I feel I bought them on the cheap. Buying relatively cheaply has also inflated the dividend yield on these shares. I like to think that Buffett would approve.