Legendary investor Warren Buffett has made billions by buying shares when stock markets fall. He buys quality stocks when prices are down and watches them soar in value when markets recover.
It’s a tactic I’ve been using as UK shares have approached bear market territory in 2022. And it’s one that more than half of share investors are looking to adopt in the months ahead, too.
“High upside potential”
Financial services business deVere Group surveyed 700 of its clients across the globe. And it found that 56% of them intend to buy more stocks before the end of 2022.
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Chief executive Nigel Green says that “investors are preparing to use the downturn to their financial advantage by building their future wealth with quality stocks at lower prices”.
That’s despite severe stock market falls that include the S&P 500 putting in its worst first-half performance for 50 years.
Green notes that this is good as it shows individuals are thinking about investment with a long-term view. He adds that “sensibly they are not only remaining fully invested but they are looking to build their investments”.
Diversification is key
Green also stresses the need for investors to invest wisely in this environment of market volatility and high inflation. And he says that diversification “remains your best tool to reach your financial objectives”.
Warren Buffett is a walking, talking example of the benefits that a diversified shares portfolio can bring.
A look at the latest SEC filing of Berkshire Hathaway — the investment firm Buffett has controlled since the 1960s — illustrates the vast range of industries he has an interest in. The company’s holdings include Apple, Bank of America, Amazon, Coca-Cola, Chevron, and General Motors.
Owning a collection of cyclical and counter-cyclical shares has allowed Buffett to generate solid and stable returns at all points of the economic cycle. It has also allowed him to capitalise on key growth trends like increasing mobile phone usage, a phenomena which has made him a fortune from owning Apple stock.
Reinvesting like Buffett
Buying on the dip and diversifying my stocks portfolio are Warren Buffett tactics I’ve used myself. So is investing in companies that have strong competitive advantages (known as economic moats), and looking beyond just low P/E ratios to find value.
But I don’t just use Buffett’s principles to help me pick shares. I also follow his lead by reinvesting the proceeds of my investments into other investments. This is known as compounding. And it can supercharge the long-term returns I can make.
This way I’m not just earning interest on my initial capital outlay. I’m making money on that capital and the interest. And over a period of time my wealth can snowball as I earn interest on all the interest payments I’ve received since my initial investment.
Albert Einstein reportedly once called compound investing “the eighth wonder of the world.” Thinking like Warren Buffett and reinvesting in stocks can help investors make stunning returns from it.
