The Motley Fool

I’d Follow Warren Buffett’s Lead and Capitalise on Cheap Stocks After the Market Crash

Image source: Getty Images

Warren Buffett has built his career on buying cheap stocks and holding them for the long run.

Following the 2020 stock market crash, a number of sectors are unpopular among some investors. This could create buying opportunities for other long-term investors.

Of course, political and economic risks remain at high levels. As such, holding some cash in reserve in case of a second market crash could be a shrewd move that strengthens your financial prospects over the long run.

Following Warren Buffett’s lead

Warren Buffett’s value investing focus means that he has always sought to purchase high-quality companies when they trade at cheap prices. In many cases, opportunities to do so have occurred when the economic outlook is relatively weak. As such times, investors are generally downbeat regarding the prospects for a wide range of businesses. This can mean that they underestimate the capacity of companies to survive a period of weak operating conditions, as well as their ability to recover as the economic outlook improves.

The 2020 stock market crash has produced such conditions. Some stocks have rebounded after their March lows. However, investors are likely to find a relatively large number of companies that trade on valuations that are significantly lower than their historic averages. This may allow them to buy high-quality businesses at low prices to benefit from their likely recovery over the coming years.

Investing in a recovery

Warren Buffett has always taken a long-term view of his portfolio. He is far less concerned than most investors with the performance of his holdings over a period of weeks and months. Instead, he focuses on how his stocks will perform over a period of many years.

The current prospects for many companies may lead investors to think that a recovery is not possible. That may be true over a short period of time, but over the long run the stock market is likely to enjoy a sustained bull market. Its track record shows that it has always come back from bear markets to produce new record highs. This could lift the valuations of currently unpopular stocks as investor sentiment improves.

As such, following Warren Buffett’s lead and adopting a long-term view could be crucial to your investment success. It may enable you to fully capitalise on the recent stock market crash and its subsequent recovery.

Cash savings

Warren Buffett also holds large amounts of cash at all times. This may mean his returns are held back to some degree. However, it also provides him with financial flexibility to act should there be further downturns in the short run.

As mentioned, risks are high at the present time. Therefore, there is a real threat of a second stock market crash. This may mean that holding some cash is a good idea. It could allow you to take advantage of further buying opportunities that may be ahead.

Just Released! 5 Stocks Under $49 (FREE REPORT)

Motley Fool Canada's market-beating team has just released a brand-new FREE report revealing 5 "dirt cheap" stocks that you can buy today for under $49 a share.
Our team thinks these 5 stocks are critically undervalued, but more importantly, could potentially make Canadian investors who act quickly a fortune.
Don't miss out! Simply click the link below to grab your free copy and discover all 5 of these stocks now.

Claim your FREE 5-stock report now!

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss an important event.

Iain Butler and the Stock Advisor Canada team only publish their new “buy alerts” twice a month, and only to an exclusively small group.

This is your chance to get in early on what could prove to be very special investment advice.

Enter your email address below to get started now, and join the other thousands of Canadians who have already signed up for their chance to get the market-beating advice from Stock Advisor Canada.