Today’s a great time to go shopping for shares, as the crashing FTSE 100 now contains loads of bargain stocks. However, simply rushing around buying the cheapest shares you see is a recipe for disaster. Some companies may struggle even after the coronavirus lockdown eases. Instead, listen to Warren Buffett, the world’s greatest investor.
After the stock market crash, you can find bargain stocks all over the FTSE 100, but they need to have recovery potential as well. Before using the bear market to load up your Stocks and Shares ISA, heed Buffett’s wise words.
The first thing you need at times like these is the courage to go shopping for crashing FTSE 100 bargain stocks in the first place. Buffett famously suggested that, at times like these, you need to be “greedy when others are fearful,” but he didn’t stop there.
Crashing FTSE 100 opportunity
He also said that: “Someone’s sitting in the shade today because someone planted a tree a long time ago.” Any investment you make today is like planting a tree. We live in uncertain times, as nobody knows how long the lockdown will last (even the government), or how rapidly the economy will recover. Trees take time to grow. You should aim to hold any bargain stocks you buy today for the long-term.
Buffett also said: “Price is what you pay. Value is what you get.” This is vital to remember right now. Crashing FTSE 100 shares may look so cheap, but they don’t all offer value.
I would be wary of buying cruise operator Carnival, for example, even though many investors hopped on board during last week’s rally. I think it could be a long time before people are willing to book cruises in large numbers. There are better bargain stocks out there.
Choose your bargain stocks carefully
I am also wary of airlines, such as easyJet and British Airways owner International Airlines Consolidated Group, as the return to flying will be slow, and hampered by many restrictions. Cheap isn’t everything. Value is.
Another Buffett saying applies now: “It’s only when the tide goes out that you discover who’s been swimming naked.”
The tide has definitely gone out now, leaving the crashing FTSE 100 on the rocks. Covid-19 gives poorly run companies an easy scapegoat. I’d be wary of buying any company that’s cheap because it was struggling before the crisis struck, as it will find the recovery hard too.
Buffett would know
Companies such as NMC Health, Pearson, and Centrica were the three worst performers on the FTSE 100 last year. The stock market crash hasn’t suddenly made them unmissable bargains.
Buffett would want to take advantage of a stock market crash like this one to buy bargain stocks. He wouldn’t buy just anything, though.
