Key Points
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Warren Buffett has frequently endorsed the idea that investors should take advantage of the fears of others.
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One of his original pieces of advice is that “bad news is an investor’s best friend.”
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Here’s how to implement that idea into your own investment strategy.
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Warren Buffett is well-known for his track record of successful long-term investing. He’s also known for his nuggets of investing wisdom.
Anybody who’s worried that stock prices might be hitting unsustainable levels will likely take solace in some of his original advice.
It’s no surprise that Buffett takes a bit of a contrarian view of the markets. A lot of people try to chase the latest hot stock or recent winners. Buffett looks for value. He looks for stocks that are on sale, yet have durable business models to back them up. The former CEO of Berkshire Hathaway (NYSE: BRKA)(NYSE: BRKB) has never owned the most exciting portfolio, but his results speak for themselves.
If you’ve read the recent headlines about inflation, the war in Iran, or the possibility of rate hikes from the Fed, there’s certainly some potentially bad news to consider. But as Buffett would say: “Bad news is an investor’s best friend.”
Buffett takes advantage of market fears
Warren Buffett has never minded a bear market. In his view, the fear that comes with bear markets creates opportunities for those who react to the volatility.
When investors panic, they often sell the stocks of strong companies in an effort to get out of the market altogether. That can push stock prices below their intrinsic value, which is where Buffett considers buying.
Buffett doesn’t try to predict corrections or forecast economic trends. He understands the value of a company, its long-term prospects, and the current share price of the stock. If the business is still strong but the stock is too cheap because the market has been selling, that’s usually when Buffett becomes interested.
Look for quality and growth, but don’t pay a high price for them
Earlier this year, when the S&P 500 (SNPINDEX: ^GSPC) fell around 9%, Buffett insinuated that he was nowhere close to buying that dip. It emphasized another long-held Buffett tenet: Just because a stock price is lower doesn’t make it a value stock.
He’s also indicated time and again that he focuses on quality above all else. Owning high-quality businesses with durable competitive advantages, consistent earnings growth, and a sustainable long-term business model is the Buffett model.
The second piece of that is valuation. Even a great company can be a poor investment if the stock price is too high. Buying quality at a reasonable price can offer some defensive protection in rougher economic climates and ultimately lead to better long-term returns.
Just because stock prices are declining doesn’t mean it’s time to panic. In many cases, it’s an opportunity to pick up solid businesses at great prices.
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David Dierking has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway. The Motley Fool has a disclosure policy.
