Whenever the markets take a dive, many investors look to the Oracle of Omaha for investing advice and to determine their next moves. Here’s what Warren Buffett has been doing since we officially entered a bear market.
What Is a Bear Market?
Every investor should understand the difference between a bull market and a bear market. Currently, we are entering a bear market which occurs when the stock market shows a long period of decline. It officially crossed that threshold in June when the U.S. stock market experienced more than a 20% decline in prices. After reaching all-time highs in January, it dropped 21% by June.
Unfortunately, this downturn is due to more than just market volatility. It was caused by a variety of factors including the far-reaching economic effects of the pandemic, inflation rates, a dip in the housing market, and investors allocating their assets away from securities. And, no one can be certain how long it will last.
What Would Warren Buffett Do in a Bear Market?
When people’s portfolios are taking a hit, many look to the ultra-wealthy and savviest investors to take their investing cues. Warren Buffett has been investing since he was 11 years old. Over the next 80 years, he has since become one of the most successful investors of all time and one of the wealthiest people in the world. He has weathered every market which is why many look to him for reassurance. So, what is Warren Buffet doing in this bear market?
The truth is that he is giving the same advice he always does. Here are six of the key principles of Warren Buffett’s investing philosophy.
1. Cash is not a good investment.
Contrary to what many people believe, Buffett does not believe that cash is king. Although we need it to survive, it is not the best place to invest your cash surplus. The value of cash depreciates over time with regular inflation rates. And, its value is further eroded by the current inflation spikes we are experiencing now. If you have a cash surplus, it is better to invest in more productive assets.
2. Invest in productive assets.
While it seems obvious, you want to invest in productive assets that build your net worth. In order for it to be productive, an asset must meet expectations of what kind of yield it will deliver. Therefore, you should first evaluate what you expect in returns and then utilize capital to acquire more productive assets. If an asset is not generating more wealth, it may be time to cash it in.
3. Stay in your circle of competence.
Warren Buffett is a smart man. However, he openly admits he does not understand every industry. He has found success because he has stayed within his circle of competence. For example, he never invested in the tech industry because it was beyond his scope. Because of this aspect of his philosophy, he avoided huge losses when the dotcom bubble burst. While you don’t have to understand everything, gravitating toward what he knows has helped make him one of the richest men alive.
4. Evaluate companies first.
Another habit that has served him well is performing due diligence before he buys into a company. He will evaluate a company and look at how much is it selling for vs. how much they think it is worth. Doing research on potential opportunities is an important step in preventing you from making a bad investment.
5. Play big and don’t waste an opportunity.
While losing money is never a good thing, a bear market may also present new opportunities. And if you want to make money, you have to seize them when they come. Warren Buffett has created a strategy that also considers the potential a bear market provides to acquire valuable stocks at a good price. But, he also warns that if you want to bring in profit, you can’t do it on a small scale when the opportunities come along.
6. Invest in yourself.
Finally, Buffett firmly believes that you are your most valuable asset. No one can take away your knowledge, talent, and experience. So, educate yourself and build your own talent. Find ways to increase your value by learning new skills and never underestimate your own value. It will be a valuable tool as you decide how to manage your investments.
Does a Bear Market Mean We Are Heading Towards a Recession?
Although we are firmly in the midst of a bear market, the looming question still remains. Are we heading towards a recession? Some fear that it may be even worst than the one we experience in 2008. However, other investors choose to view it as a normal market correction and a positive sign that a bull market is coming.
Without a doubt, a bear market is often among the first indications that we are entering a recession. But, that isn’t always the case. It’s important not to panic and start selling off your investments simply because we are seeing stock prices drop. Sometimes it really is the result of a market fluctuation, especially after so many years of living in a bull market. However, if we continue to see market losses in the months to come and inflation continues to rise, we very well could find ourselves facing a recession.
The simple truth is that no one knows, so it is impossible to answer this question with any amount of certainty. While there is no crystal ball to tell us what lies ahead, the philosophy created by the Oracle of Omaha may help you protect your investments.
Read More
- How to Protect Your Portfolio Before a Recession
- What Investors Can Learn from Warren Buffet
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Jenny Smedra is an avid world traveler, ESL teacher, former archaeologist, and freelance writer. Choosing a life abroad had strengthened her commitment to finding ways to bring people together across language and cultural barriers. While most of her time is dedicated to either working with children, she also enjoys good friends, good food, and new adventures.