After watching the FTSE 100 surge back to almost 6,500 in June, we’ve since seen a slow-motion decline that’s left the blue-chip index dangerously close to 5,500. Are we about to see a second stock market crash?
I don’t really know. But I’m not too worried. In fact, I’m planning to follow the example of legendary US investor Warren Buffett. I’m not selling and I’ll ramp up my buying efforts if prices keep falling.
I’m not selling
Buffett once said that “when we own portions of outstanding businesses with outstanding managements, our favourite holding period is forever”. That’s my aim. I only ever want to sell stocks if I no longer believe the companies are likely to make good progress in the future.
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Because my investing timeframe is pretty much open-ended, I don’t need to worry about share prices today. What I do need to worry about is whether the companies in which I’m invested can make a good recovery. Buffett has a quote for this, too — “the most important thing to do if you find yourself in a hole is to stop digging”.
For this reason, I have sold a few shares this year. These have been strictly limited to companies where I have concerns about their financial health and growth prospects.
Why I’m buying shares in the stock market crash
Buffett once said that “the best chance to deploy capital is when things are going down”. I’ve been buying in recent months and as share prices fall, I’m planning more purchases.
Although the coronavirus pandemic and likely recession is making things tough right now, history tells me that this situation won’t stay the same forever. At some point, the economy will return to growth, people will start travelling again and oil prices will (probably) increase.
I’m certain that this will happen eventually. When it does, investors will suddenly forget the stock market crash and start buying shares again. Before then, I want to make sure that I’m fully invested in good companies I’ve bought at depressed prices. This should help me generate market-beating returns from my investments over the coming years.
It’s easier to spot bad businesses today
I’ve got another Buffett quote for you: “Only when the tide goes out do you discover who’s been swimming naked”.
What this colourful quote means is that when times are good, it’s much easier for companies to disguise their weaknesses and keep their profits (and share prices) inflated. When times are tough, it’s much harder to conceal any problems.
I certainly feel that it’s easier to find good businesses at reasonable prices than it was a year ago. These are the stocks I’m trying to buy right now.
What am I buying in the stock market crash?
I’ll finish this piece off with one final Buffett quote. “Never invest in a business you cannot understand”.
For this reason, I have stayed away from the rush to invest in small pharmaceutical stocks. I have no idea which will be successful, and which will disappear without trace.
Instead, I’m sticking to sectors where I think I have some understanding. Examples of the areas where I have been buying include defensive consumer stocks, energy, financials, and technology. I just hope that share prices don’t start rising before I’ve finished buying!
