Warren Buffett (Trades, Portfolio)'s investment letters from 2008-2009 provide some guidance for investors in this interesting time. While we do not know what the future will bring, some opportunities are starting to emerge in the market.
As trying to time the market is generally a waste of time and effort, taking advantage of these opportunities as and when they present themselves seems to be the best strategy.
Indeed, some of the best and most respected value investors of all time, such as Howard Marks (Trades, Portfolio) and Seth Klarman (Trades, Portfolio), advocate this approach.
That being said, is it still impossible to tell what the world will look like when a new crisis eventually dies down. Therefore, investors need to be careful when it comes to picking stocks for the future. Some companies might not survive long enough to benefit from the recovery. Others might also be left behind by technological and economic changes.
Buffett's 2008 investment strategy
Buffett faced the same problems in 2008. He navigated the situation using some advice from his right-hand man and vice-chairman of Berkshire Hathaway (BRK.A, Financial) (BRK.B, Financial), Charlie Munger (Trades, Portfolio).
In his 2009 letter to investors, Buffett outlined four examples of how he was applying Munger's way of thinking to his investment process. These included avoiding businesses neither he nor Munger understood:
"Charlie and I avoid businesses whose futures we can't evaluate, no matter how exciting their products may be. In the past, it required no brilliance for people to foresee the fabulous growth that awaited such industries as autos (in 1910), aircraft (in 1930) and television sets (in 1950). But the future then also included competitive dynamics that would decimate almost all of the companies entering those industries. Even the survivors tended to come away bleeding...
We will never become dependent on the kindness of strangers. Too-big-to-fail is not a fallback position at Berkshire. Instead, we will always arrange our affairs so that any requirements for cash we may conceivably have will be dwarfed by our own liquidity. Moreover, that liquidity will be constantly refreshed by a gusher of earnings from our many and diverse businesses...
We tend to let our many subsidiaries operate on their own, without our supervising and monitoring them to any degree."
Ignoring Wall Street buy and sell advice is another piece of advice from Munger and Buffett. Instead of following Wall Street, Munger and Buffett advise making your own decisions based on an unbiased observation of the facts:
"We make no attempt to woo Wall Street. Investors who buy and sell based upon media or analyst commentary are not for us. Instead we want partners who join us at Berkshire because they wish to make a long-term investment in a business they themselves understand and because it's one that follows policies with which they concur."
An investing roadmap
These are only guidelines, which are designed to present a rough roadmap for investors. Like so much of investing, there's no set template investors can refer to in times of crisis. Nevertheless, these guidelines offer a great template investors can use when looking for bargains in the current market.
As uncertainty prevails, it makes sense to stick with businesses you know and understand. It also makes sense to avoid businesses that have a lot of debt and stick with companies that have competent managers.
Finally, it is always sensible to avoid making knee-jerk trading decisions based on Wall Street recommendations. Your own research is the best way to reduce risk when investing. Relying on the work of others is generally not sensible because there is always going to be a level of subjectivity in the figures. You only need to look at Wall Street's price targets for a single stock to see how wide these variations can be.
Disclosure: The author owns shares in Berkshire Hathaway.
Read more here:
- Warren Buffett on How to Deal With the Looming Prospect of Inflation
- We Might Not Be at the Bottom, but There Are Bargains
- Warren Buffett's Rules for Investing in a Crisis
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