One of the advantages a long career has given investor Warren Buffett is personal experience of different market conditions. He has lived through stock market surges – and crashes. When the stock market falls, there is one bit of Buffett advice I use to try and improve my own investment returns.
Seizing rare opportunities
That advice is summed up in Buffett’s words, “Opportunities come infrequently. When it rains gold, put out the bucket, not the thimble“.
I think the Sage of Omaha makes several insightful points here. First, it is interesting that he emphasises the rareness of what he sees as attractive opportunities. Some investors think there are always opportunities in the market. But Buffett has been able to build his long-term success by ignoring good opportunities and focussing only on what he sees as great ones. That takes discipline as an investor, but it can lead to powerful results. With Buffett’s high standards, it makes sense that he sees opportunities only infrequently.
He then says to “put out the bucket“. In other words, when a great opportunity comes along, Buffett reckons it is worth going for it in a big way. As he has said about his investment approach in such situations, “to do it on a small scale is just as big of a mistake, almost, as not doing it at all”.
Stock market fall
I think the above advice can make sense as an investment approach at any time.
But I think it is particularly useful when it comes to a stock market fall. That is because the price of many shares can slide at such a time, including companies whose prospects have not really changed. Suddenly, a company that previously looked expensive can start to look like good value.
Buffett follows his own advice in this regard. One of his largest holdings is American Express. The characteristics of the business make it a classic Buffett pick. Its strong brand and customer base give it an ongoing competitive advantage. But it was only when the so-called salad oil scandal caused US financial shares to fall sharply in the early 1960s that Buffett bought his large position in American Express. He saw what he thought was a great opportunity due to a short-term share price fall – and put out his bucket.
Investing like Warren Buffett
I can get ready to do the same now, by making up a list of companies I think might be great opportunities for me if I could buy them at an attractive price.
For example, I like the drinks business Diageo, but its current valuation is not attractive to me. However, the company is on my watchlist. If its share price tumbled in a stock market fall, the valuation might become more attractive to me.
In that case, like Buffett, I could put out my bucket. But stock market falls can be sudden and short-lived. So when things are calm, I take time to find shares that can earn a place on my investing wishlist. That way, when the storm comes, I can be ready with my bucket.