Warren Buffett has a reputation for taking advantage of investment opportunities as and when they appear. He’s especially known for buying shares when most investors are busy selling, allowing him to add top-notch companies at bargain prices to his portfolio.
It’s a strategy that the ‘Oracle of Omaha’ continues to deploy today. In fact, following the latest round of volatility in 2022, he’s been on another shopping spree buying more than $50bn of stock so far this year. That’s the most active he’s been since the 2008 financial crisis. And by following his strategy, I could enjoy substantial returns as he has in the long run.
Investing opportunities rarely get this good
Despite popular belief, stock market crashes and severe corrections like the one we’ve seen this year are actually quite rare. Excluding the short-lived Covid crash in 2020, the last time we saw stocks trading this cheaply was in 2008 – over 14 years ago!
This probably explains why Buffett has been busy buying like there’s no tomorrow. Investors only get a handful of these buying opportunities throughout their lifetimes. Yet, most miss out by falling prey to their fear emotion. And it’s easy to understand why. After all, it’s pretty difficult to remain confident in an investment thesis when share prices are seemingly in freefall.
But as history has demonstrated countless times, fortunes are made in bear markets. And the window of opportunity for investors in 2022 may have begun to close. A big driver behind the decline of stock prices is inflation, which has already started to reverse both here in the UK, and across the pond in the US.
Buffett’s focus on the long term
The stock market recovery process may have already begun, or it could be months away. It’s anyone’s best guess at this stage. But it’s important to note that share prices won’t magically recover overnight.
Historically, recoveries can take anywhere from a couple of months to several years. That’s why when buying in a bear market, Buffett isn’t expecting short-term gains. He’s focused on the long term. And it’s a strategy that requires a lot of patience.
When stock prices begin to climb again, the process is exponential. In other words, recoveries start slow and then gradually accelerate.
As the economy improves, businesses start to deliver growth again as consumer spending slowly ticks up. This attracts investors back to the fold, driving stock prices higher, and reducing the cost of capital.
With more accessible external financing, companies can deliver more growth, which attracts more investors in a loop triggering a new bull market. And suppose it’s anything like the one we’ve just had. In that case, Buffett, and similarly my portfolio, could have another decade of stellar performance.
But that doesn’t mean I’m going all-in today. As I said, when the recovery will begin is anyone’s best guess. And it’s possible that stock prices have yet to fall further, especially if the fears surrounding a recession end up materialising. Instead, I’ll be drip-feeding new shares into my portfolio over the coming months.
While this does mean I could potentially end up paying higher prices, it mitigates the risk of further declines. But it also means that if stocks fall further, I can capitalise on even better bargains.