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How following Warren Buffett could help you prosper in a recession

Alan Oscroft
close-up photo of investor Warren Buffett

It’s all doom and gloom these days, with the FTSE 100 falling along with all the world’s other major indexes. And investors the world over are fretting over what’ll happen next week.

I reckon the surest way to calm troubled waters is to ask “What would Warren Buffett do?” I’m sure he’s not worried in the slightest by the prospect of even a few years of weak markets. On the contrary, I expect he’s salivating over the possibility of picking up some bargain shares.

Long-term

Buffett famously said that if you’re not comfortable owning a stock for 10 years, you shouldn’t own it for 10 minutes. But doesn’t he adjust that when there are signs of a market meltdown coming? No, that would be missing the point, which is that you should only buy a stock if you’d be happy holding it for a decade… whatever the market or the economy might do over that period.

Looking at a risky company that should be fine in good times, but which might struggle in a downturn? According to Buffett’s rule, that’s one you should never buy, not even when the economy is healthy and all is fine with the world.

Couldn’t you sell the moment things start to look a bit shaky? Buffett also said: “Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.” So no, treat each purchase as if the market’s going to close for a decade the day after you buy it, making it impossible for you to sell in the mean time.

That should focus your mind on investing only in companies that are so good they’ll shine over the long term, regardless of short-term ups and downs.

Good price

Buffett’s “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price” rule comes to the fore here. Truly wonderful companies have defensive qualities that protect them when times are hard. All you really need to do is buy them when the price is enough to provide an adequate safety margin.

What should you do when we’re actually in a recession and markets are down? If you don’t have extra cash to invest, you could just switch off the market. By that, I mean forget share prices, don’t even look at them, and don’t come back until the recession is over (or when the current crisis, whatever it is, has ended). That would take steely nerves, mind, but Warren Buffett certainly has those.

Benefit from fear

If you do have more cash to invest, you should be rubbing your hands with glee — and planning to follow Buffett’s “Be fearful when others are greedy and greedy when others are fearful” rule. When all the so-called experts are weeping and wailing and selling their fallen shares because they’re too afraid of what might happen tomorrow, or next week, that’s the time to help yourselves by taking them off their hands at a bargain price.

It’s what I’m planning to do. I have a significant sum in my SIPP, recently liberated from a managed company pension fund, just waiting for me to buy great shares at depressed prices. Recession? Bring it on.

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Views expressed in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Motley Fool UK 2019