Warren Buffett is arguably the world’s greatest investor. Starting in his early teens, the ‘Oracle of Omaha’ has amassed a multi-billion dollar fortune by investing in the stock market. Fortunately, his strategy isn’t actually all that complicated and nor is it a secret.
That’s why following his approach today could be a sound move to building a sizable nest egg for retirement – even for investors starting from scratch.
Capitalising on a stock market correction – Buffett-style
At the heart of Buffett’s investing method lies value. Value is what an investor owns after buying shares in a business, and price is what they paid for it. The trick is to find investment opportunities in those whose share price falls below the intrinsic value of the underlying company.
Normally, identifying undervalued stocks is quite a challenge requiring in-depth corporate analysis. However, today we’re in a fortunate position. With the stock market having had a bit of a tantrum since October 2021, stocks from all sectors have been battered into the ground by fearful investors. Having said that, it doesn’t mean every business is a bargain.
There are plenty of stocks crashing in 2022 for a good reason. But how can I tell the difference? The first thing I’d do is find out why a share price is dropping. If there is a fundamental problem that compromises future cash flows, then it’s likely prudent to stay away. However, if problems appear to be short-term hiccups, this might be a buying opportunity.
But there’s an important second step that Buffett deploys. And that’s to only invest in undervalued companies with a wide moat. In this case, a moat is a collection of competitive advantages that makes a business stand out from its peers.
By having an edge that’s difficult to replicate, such as a patent portfolio, unique access to resources, or an established brand, these companies often stay ahead for decades to come. And in some instances, they can even develop into industry titans.
Needless to say, the companies that make it to the top generate substantial wealth for their shareholders. And that’s how I aim to grow my nest egg.
Investing in volatile times
Stock picking is not for everyone. Being able to identify undervalued high-quality businesses is one thing. Holding onto those shares when times get tough is another. As we’ve seen this year, the stock market can be a volatile place. And it’s entirely possible for a portfolio of fantastic companies to drop by double digits during times of crisis.
The urge to sell when stocks are in free-fall is strong. After all, no one likes watching their money disappear. Yet this is often the mistake that reverses years of progress.
Instead of seeing crashing prices as a disaster, I view it as a rare opportunity to bolster positions while everything is on discount. That’s what Buffett’s investing strategy suggests. It’s worth noting that since the start of 2022, he’s spent more than $51bn buying shares while they’re cheap.
That’s why I think now could be the perfect time to start buying undervalued stocks. After all, when the stock market recovers, the upward momentum will provide a solid boost to my nest egg, potentially bringing me one step closer to early retirement.