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Robert Stephens, CFA
Robert Stephens, CFA
Articles (358) 

Warren Buffett’s Tips on Using Economic Uncertainty to Your Advantage

A changing outlook for the economy could offer buying opportunities

May 19, 2020 | About:

The outlook for the economy has changed dramatically in the past few months. Rising unemployment numbers, lower business confidence and reduced consumer spending could mean that the economy’s near-term performance is disappointing for investors.

Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) chairman Warren Buffett (Trades, Portfolio) has experienced many economic downturns and recessions in his investing career. Rather than being a cause for concern, he views economic uncertainty as an opportunity to refresh your portfolio and capitalize on attractive valuations for quality businesses.

Capitalizing on economic uncertainty

A worsening economic outlook can lead to difficult operating conditions for many companies. For long-term value investors, this may present an opportunity to buy quality businesses at more attractive prices.

Buffett has been able to capitalize on this scenario through buying undervalued stocks many times during his career. As the Oracle of Omaha once said, “Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it.”

Taking a long-term view

Even though the Federal Reserve has announced a vast stimulus plan that includes measures such as zero interest rates and an unlimited asset repurchase program, an economic recovery could take some time. Therefore, adopting a long-term view of your holdings may help you to deal with short-term volatility caused by economic uncertainty.

Buffett pointed out the potential for a difficult economic outlook to cause a prolonged period of weak GDP growth during the financial crisis:

“Americans are in a cycle of fear which leads to people not wanting to spend and not wanting to make investments, and that leads to more fear. We'll break out of it. It takes time.”

Being honest about your holdings

Economic uncertainty can change the prospects for a wide range of industries. Previously, some sectors may have offered favorable risk/reward opportunities for investors. However, due to a changing outlook, it may be a good idea for investors to sell holdings that have no clear path to the future. As Buffett once said, “Should you find yourself in a chronically leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks.”

An example of Buffett following this advice was seen in April 2020, when he sold all of Berkshire Hathaway’s airline holdings due to a lack of clarity regarding the future of the business.

Accepting uncertainty

The economy’s outlook may be relatively uncertain at the moment, but the future is never clear. Unexpected events can occur at any time and may lead to a sudden decline in stock prices.

Therefore, investors should always ensure a margin of safety when buying any stock, as this may offer some protection against an economic outlook that is subject to change at any time.

Buffett has discussed the potential for economic uncertainty to be a constant that investors must learn to fully address:

“People talk about this being an uncertain time. You know, all time is uncertain. I mean, it was uncertain back in 2007, we just didn't know it was uncertain. It was uncertain on September 10th, 2001. It was uncertain on October 18th, 1987, you just didn't know it.”

Disclosure: The author has no position in any stocks mentioned.

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