Value investors may be finding it tough to unearth attractive investment opportunities at the moment. The economic outlook is uncertain, with the U.S. economy now in recession. Despite this, investor sentiment has improved rapidly since its March lows.
Berkshire Hathaway (BRK.A, Financial) (BRK.B, Financial) chairman Warren Buffett (Trades, Portfolio) has experienced similar periods in his career. In my view, his ability to maintain a simple strategy and back a long-term U.S. recovery could be reasons why he has previously capitalized on uncertain economic periods to generate market-beating returns.
A simple approach
A simple approach to apportioning your capital could be highly rewarding given the challenging economic outlook.
Instead, using your time to assess company fundamentals could be more rewarding than trying to predict how stock prices will perform. For instance, identifying businesses with economic moats, secure finances and margins of safety may lead to a more efficient allocation of your capital on a long-term basis.
Some investors may view this strategy as being overly-simplified given the complex nature of the problems currently faced by the economy. However, Buffett has previously discussed his preference for a simple strategy when deciding how to invest capital in a range of economic conditions: “The business schools reward difficult complex behavior more than simple behavior, but simple behavior is more effective.”
Banking on a recovery
An economic recovery from the 2020 recession is not guaranteed. Changes such as a high rate of unemployment could take time to reverse.
However, the economy’s past performance suggests that it is very likely to return to positive growth over the long run. Policy changes such as the Federal Reserve’s asset repurchase program could stimulate economic growth.
This should mean that, over time, the valuations of quality businesses rise so that they offer narrower margins of safety. Therefore, long-term investors who take an optimistic approach to the economy’s prospects and to the stock market’s recovery potential are likely to be rewarded.
Patient investing
Finding worthwhile investing opportunities may now be more difficult after the stock market’s recent gains. This may tempt some investors to buy stocks even if they no longer offer a wide margin of safety.
This may lead to disappointing returns should the economic outlook fail to improve. A better idea could be to adopt a patient approach when managing your portfolio and wait for the right buying opportunities to appear.
Long-term investors do not need to be active. They also do not require a large number of "winning" stocks to generate high returns. Instead, they may benefit from avoiding overvalued opportunities at a time when an uncertain economic outlook may warrant wider margins of safety.
Buffett has highlighted his contentment in doing nothing for long periods if favorable investing opportunities do not present themselves: “You do things when the opportunities come along. I've had periods in my life when I've had a bundle of ideas come along, and I've had long dry spells. If I get an idea next week, I'll do something. If not, I won't do a damn thing.”
Disclosure: The author has no position in any stocks mentioned.
Read more here:
- Mohnish Pabrai on Using Value Investing to Outperform the Market
- Peter Lynch on the Importance of Basic Investing Principles
- Seth Klarman on Looking Beyond the Short Term
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