The global economy is experiencing another crisis, a widespread set of losses that are making conventional trading look risky and getting day traders nervous.
First, there’s the coronavirus which causes all sorts of uncertainty and volatility in the markets and started dragging down index behavior a few days ago. Markets are likely to fall further on not just coronavirus fears, but the actual loss of business as retailers suffer from people staying home.
Then we have a conflict between Russia and OPEC countries this week that sent oil prices down significantly.
The American stock market has plunged to year-long lows – with the Dow Jones Industrial Average around $26,000 and the S&P 500 losing all of its gains over the last year, investors are understandably frazzled.
Even some of the investments that are often seen as safe-haven alternatives to American equities are experiencing losses. Instead of booming because of stock traders taking money out of the markets, Bitcoin is actually down a lot, almost 10% – and bond yields are low, too.
So if cryptocurrencies, equities and commodities are all losing value at a fast clip, what can investors do?
One fundamental answer involves looking at the strategies of an experienced trader – in fact, a man so financially savvy that many call him an investment wizard.
Warren Buffett’s Post-2008 Recession Play
For many years, Warren Buffett has been known for his financial empire. He is seen as one of the most self-made high-net-worth individuals in America. Journalists love to chart his course, from his original successful investments to his Berkshire Hathaway real estate business and beyond.
However, when it comes to dealing with down markets, Warren Buffett’s story offers new traders and seasoned professionals alike a road map to being able to benefit from the enormous market losses that have most of us stumped.
Looking back at what happened after 2008, we can see that Buffett put significant money into various blue-chip companies that were struggling because of investor panic.
Everyone was selling off equities, and big companies were under pressure.
Warren Buffett put a staggering $5 billion into Goldman Sachs, and another similar amount into the Mars/Wrigley deal. According to the Wall Street Journal, (as passed on by an article at The Week), these big moves netted Buffett around $10 billion to date.
Now, here’s the thing about Warren Buffett strategy – in order to do what he did, he had to be holding large amounts of cash through a market that was gaining, albeit slowly.
Most financial advisors and pundits are going to tell investors to always have money in the market, because it’s always gaining value. They’re not going to consider that you might make more money keeping cash on the sidelines and buying after a dip or a crash. That’s seen as “too dangerous” for the average investor – as if it’s not dangerous to see slow, steady gains wiped out by a crash.
Buffett’s strategy was simple – he declined small, incremental gains that he would have made in a slowly growing equity market, so that he could buy undervalued stocks and get enormous gains quickly.
This makes abundant sense for the investor, but it also has an altruistic facet to it, because these companies were under pressure and they needed investment at that point in time.
If you get enough Warren Buffetts, theoretically, you could mitigate any kind of global economic disaster by pushing cash into companies when they need it the most. In many ways, it’s a win-win for stressed markets and individuals who want to make gains.
Doing the Research
Although it might work in your favor to invest in companies when they’re down, or do the same thing with cryptocurrencies or commodities, there’s no substitute for responsible research. Use venues like NewsCrypto to get familiar with everything that’s going on in fintech, for an advantage in crypto trading.
Warren Buffett or any experienced trader would not be likely to recommend moving into equities or assets without understanding what they are and what the market context is.
Bitcoin is an excellent example. Yes, it’s down right now, but that’s no guarantee that it’s going to continue to suffer along with market equities. Bitcoin’s value, in fact, does not track with the indices or the equities – it’s an alternative to the market, sort of like gold.
When you do the research, you find out all of this, and you also understand what Bitcoin value is based on. Then and only then you create your own personal strategy to make money out of the markets regardless of which way they go. Our markets have built-in menus of options and futures that allows investors to gain from losses on the broader market, but Warren Buffett’s play was even simpler and more straightforward.