When stock markets tremble, as they have been doing lately, different investors respond in their own way. Billionaire Warren Buffett looks for opportunities to build wealth thanks to great companies suddenly having a bargain share price.
He talks about being greedy when others are fearful – and there is clearly a fair bit of fear in the stock market right now, not only on Wall Street but also here in Britain.
That is why I am taking the Buffett approach and using the current market turbulence as an opportunity to try and build wealth.
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Making calm decisions in a difficult environment
An important part of that is being able to spot opportunities.
When the market falls, some share prices may fall for little or no reason. But others fall because their long-term business prospects have changed.
Warren Buffett started buying shares in Berkshire Hathaway when it was a long-established textile maker. He saw a half-full glass: the company had been successful before and its share price looked cheap.
Looking back, he now describes the move more like a half-empty glass. The shares looked cheap but they were not. The US textile business continued its inexorable decline and Berkshire eventually got out of that business altogether.
When the market trembles, it is important though not always easy to assess whether a share price has fallen without real cause, or an underlying shift in the business prospects has occurred.
A great business — but at what price?
Take Berkshire’s largest holding as an example: Apple (NASDAQ: AAPL).
Although Warren Buffett has been a large seller of the tech giant’s stock over the past year, he retains a substantial shareholding.
I think Apple is an excellent business: it has a powerful brand, large installed user base, proprietary technology, and proven business model. It has been a great investment for Berkshire, with the Apple share price growing 175% in the past five years alone.
Apple shares are now 25% cheaper than at the end of December. So, could this be a Buffett-style opportunity for me to add the tech firm to my portfolio?
I do not see it that way.
Investors have their own objectives and circumstances, so I would never buy a share just because someone else owns it – even as successful an investor as Warren Buffett.
But I also think buying a share just because it is cheaper than before can be a costly (though sometimes tempting) error, as Buffett found out with his initial Berkshire move and textile industry exposure. Instead, I prefer to focus on whether a share is cheap compared to what I think it is worth. As Buffett puts it, price is what you pay and value is what you get.
Apple stock has been falling recently for good reason. US tariff policy could hurt its profitability badly. Meanwhile, the risk of a recession could hurt customer demand for pricy gadgets.
The share sells for 31 times earnings. I already think that is expensive – and those risks mean earnings could fall.
In the current market, I am hunting for bargains that could help me build wealth. But, like Warren Buffett, I am doing that by focusing not just on price but on what I see as the long-term value of particular shares.
