scorecardresearchKnow how Warren Buffett’s 6 key investment strategies in the bear market

Know how Warren Buffett’s 6 key investment strategies in the bear market can help you

Updated: 14 Jun 2022, 10:44 AM IST

Warren Buffett wants investors to remain unperturbed in the bear market. He relies on the slowing economy to invest in stocks of companies with sound fundamentals. 

Be fearful when others are greedy, and greedy when others are fearful

Be fearful when others are greedy, and greedy when others are fearful

Warren Buffett once said that it is wise for investors to be “fearful when others are greedy, and greedy when others are fearful.” This doyen of the investment world looks at bear markets differently than how we perceive them. He regards that when markets are down, they lend the best opportunity to buy stocks of good companies at reasonable valuations.

The Buffett investment philosophy harps on how being patient and steadfast during the slowing economy will help you win in the world of investing. The legendary investor even went on to stress how retail investors must look for long-term winners in the bear markets. As fears of economic dislocation loom amid the continued downfall in Nifty, Buffett’s six investment lessons will help you tide this dark phase in the stock market that is considered most ideal by veteran investors.

Focus on the company’s operational earnings

Irrespective of which way the stock is moving or how the stock is responding to the pressures in the bear market, long-term investors must focus on what the business is doing. Almost all stocks react to high market volatility, which is mostly short-term. Investors must never mix market volatility with business outlook. This is because the stock may show volatility in the near future but will do well over time if it is supported by a strong business background.

Don’t ignore the “Power of Compounding”

Well-managed business houses do not distribute their entire profits as dividends to their stockholders. Rather, they use the money to put back into the business. The money that is compounded helps to generate more wealth in future for the shareholders. The “Principle of Compounding “underscores all sound businesses, which is why you must make the best use of the dark phase to identify companies with high Return on Equity (ROE) and high Return on Capital Employed (ROCE).

Don’t over-diversify your investments

This is the time when you deploy your excess cash to buy stocks that would perform well in the long run. However, in a bid to create a portfolio, you must not allow too much diversification in it. If you are unable to decide what to buy, then first look at your existing portfolio. Link your financial classes with relevant asset classes. You will realize your financial goals early in life only when you use your surplus money to focus on your existing asset portfolio or choose your future assets accordingly, thus, helping you to be free of financial woes and worries.

Look at the business and not the stock

The bear market is the best time for you to buy stocks that you had always wanted to invest in. Warren Buffett had said, “One should always look at a company as a business and not merely as a stock”, thus, laying down the three most important criteria needed to identify a business before investing in it.

  • The Return on Capital Employed by the business must exceed 20 per cent, i.e., the business must earn good returns on the net tangible capital needed to run its operations.
  • The business must be backed by good corporate governance, which means that it must be run by honest and dedicated managers.
  • Be sensible when it comes to buying stocks. Though Buffett firmly relies on the power of equities outperforming all other asset classes in the long run, he still sticks to the age-old belief of looking at stocks’ intrinsic value before buying them. Euphoria must never be the basis for wrong judgment even when you are looking at a stock with strong fundamentals.

Stay invested

Just because you have suffered in the past, it is no reason to feel distressed. You must follow a disciplined approach to investing. Even when the markets are weak and volatile, you must follow a systematic investment plan to invest toward your long-term financial goals. This will help you to benefit from the “Rupee Cost Averaging” by buying more units in falling or bear markets.

Equities earn more than fixed-income plans

Always, adopt a long-term investment approach. Then, you will realize how equities will outperform all your other assets, especially, the fixed-income instruments like bank deposits and debt funds in the long run. This is because when you buy stocks or equity-related instruments, you indirectly become a part-owner of the profits or losses of the business. The company grows with time, thus, impacting the prices of your stocks. As the company earns wealth, your stocks also help you garner much-needed wealth in the long run.

These are the key investment tips by Warren Buffett. 
First Published: 14 Jun 2022, 10:44 AM IST