With global stock markets in retreat, the first thing that I’d try to do is avoid panicking. At a time of crisis, volatility can rise and it’s important to take a step back and not make any rash decisions.
One billionaire investor who has witnessed multiple wars, recessions and market shocks is Warren Buffett. Often referred to as the Oracle of Omaha, he has over 70 years of investing experience. Over that time, he has shared many words of wisdom that I often re-read.
Warren Buffett tip: buy quality
His investment philosophy frequently mentions finding high-quality businesses. He notes that “it’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price”. It’s a belief also followed by popular investor Terry Smith – sometimes referred to as the UK’s Warren Buffett.
So what is a high-quality business? It could be described as a profitable, cash-generative and financially stable company. One of the main measures of business quality is return on capital employed. That’s a measure of management’s ability to turn assets into returns. Generally speaking, the greater the better.
Long-term thinking
Once I’ve found an excellent business, according to Warren Buffett I should try to hold onto it for as long as possible. He said that “if you aren’t willing to own a stock for 10 years, don’t even think about owning it for 10 minutes”. As a buy-and-hold investor, Buffett has owned some companies for several decades.
For example, his investment company Berkshire Hathaway has owned Coca-Cola shares for 34 years. Given the strength of the brand, I’m not sure if he will ever sell it. He even famously once said that “our favourite holding period is forever”. When looking for quality shares to buy, I’d try to find those that are likely to survive and thrive over long periods too.
Put out the bucket
Share prices move up and down for multiple reasons. Often the share price of a good-quality business will get knocked down regardless of the company’s encouraging fundamentals. It may be due to short-term uncertainty, like during the onset of the pandemic in March 2020.
History shows that these periods of shock and fear can be excellent opportunities to buy quality shares on sale. I’d try to recognise an opportunity as such, and make a sizeable purchase in my Stocks and Shares ISA. As Warren Buffett once quipped: “Opportunities come infrequently. When it rains gold, put out the bucket, not the thimble.”
Bear in mind that recognising a good opportunity can be difficult and takes some experience. Also, in the short term, even share prices of quality companies can still fall further. I’d need to do plenty of homework to be confident that a company will eventually recover. I might also need patience to be able to hold on for long periods while my investment grows.
Overall though, I’d hope to learn these lessons and more from one of the richest investors on the planet.