The prospect of a second stock market crash has remained relatively high over recent months. Investor optimism has improved after the March 2020 lows, but a weak global economic outlook may cause sentiment to return to lower levels in the coming months.
A second sharp decline for stock prices in 2020 would cause paper losses for many investors. But it could present a buying opportunity. Through following Warren Buffett’s value investing strategy, you could be among those who benefit from it.
A second stock market crash
The prospects for stocks continue to be very uncertain even after the recent rebound from the market crash. For example, coronavirus cases continue to rise on a global basis at a high rate. This could mean that further lockdown measures are required across major economies. And that would further disrupt the operating environments for many companies.
Furthermore, rising unemployment and weaker consumer confidence are likely to be factors in the coming months. Changing business models in response to evolving customer trends may also mean a period of uncertainty that prompts businesses, consumers and investors to become more cautious regarding spending and investment.
Buying opportunities
Warren Buffett has an excellent track record of capitalising on low valuations during a stock market crash. Most investors become fearful when share prices decline, but he sees lower stock prices as an opportunity to buy high-quality businesses at discounted valuations.
Part of the reason Buffett takes this stance is that he has a long-term view of his portfolio. Its short-term performance does not seem to interest him, as long as there is the opportunity for it to grow over a period of many years. Being able to look beyond short-term volatility and instead plan for the long term is key. It means you can more easily use market movements to your advantage when seeking to build a large portfolio.
Furthermore, Buffett invests in high-quality businesses after a market crash. These are likely to not only survive short-term economic challenges, but improve their market position through having a competitive advantage. They are likely to offer less risk, and greater return potential, in the long run due to a unique product, lower cost base or other factors such as a loyal customer base. Such companies may be better able to adapt to changing market conditions, and deliver relatively high profit growth.
Being prepared
Clearly, a second stock market crash in 2020 is not guaranteed. The world economy could experience an improving period that lifts investor sentiment.
However, it may be prudent to prepare for a second market decline through having some cash available to invest. View a stock market fall as a buying opportunity, rather than a reason to worry. Through adopting that mentality, you could follow in Buffett’s footsteps and generate market-beating returns in the long run.
