How Buffett Deals With a Bear Market

Warren Buffett is without doubt one of the most successful stock investors in modern financial history. The Oracle of Omaha has successfully piloted Berkshire Hathaway through both good and bad economic times, sticking to a proven long-term investment strategy that stresses identifying well-run companies with fundamental value, rather than just riding short-term market trends. Buffett looks at bear markets as a perfect opportunity to acquire these good companies and heavily discounted prices – a fundamental principle of effective value investing. So, how exactly does Buffett go about taking advantage of their markets as a value investor?

Buffett’s philosophy

The first thing to understand is exactly how Buffett looks at the market and the companies operating in it. He looks for particular signs of strength in a business, rather than its short-term potential on the stock market. Most importantly, he invests in companies that have a sustainable competitive advantage. This advantage may take many forms, such as market share, market position or overwhelming brand strength. This competitive advantage gives companies a long-lasting position of strength, either by denying competitors easy market access, or by controlling a limited resource.

Buffett’s criteria for investment

Buffett believes that you need to do your homework before making investment. His team at Berkshire Hathaway carries out extensive research and analysis before any investment, working their way through huge volumes of data before they reach an investment decision. He also has particular criteria that he applies when evaluating an investment. For example, company has to operate in a stronger economy or industry sector. He looks for an unassailable market position – either through monopoly or through brand loyalty. Profitable growth is also an absolute necessity. He wants to see rising earnings with strong, consistent profit margins. The company must have low debt levels compared to its equity or earnings, and must deliver high returns on capital investment. He also looks for companies that hold on to their earnings to fuel future growth – and does not like companies that have high operational costs or capital expenditures as a basic cost of doing business. Finally, he looks for companies that can raise their prices in line with inflation – so that their value is not eroded over time.

Buffett’s strategy

Buffett makes concentrated investments. In a bear market, his goal is to buy millions of shares in fundamentally sound businesses. Because of this, he typically invests in large companies – he needs to make huge investments that generate significant returns for a company as large as Berkshire Hathaway. He also believes in investing in companies that he understands – for example, he did not buy technology companies during the boom, since he did not believe they had been in existence for long enough to demonstrate a proven performance history. In bear markets, one of his favorite targets is blue-chip stocks, since these often have depressed stock prices, but continue to deliver good dividends. His ability to provide massive cash infusions also works it to his advantage – these can often lead to better deals than are available to the investor on the street.

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