Warren Buffett has always maintained an upbeat view on the chances of a stock market recovery. For example, when purchasing stocks during the financial crisis, the billionaire investor was vocal about the likelihood that the world economy and global stock markets would rally after their losses.
Therefore, using a similar approach could be profitable today. The FTSE 100 and FTSE 250 have rallied in recent weeks. But there are still numerous stocks trading on valuations that are below their long-term averages. They could offer high returns in a recovery, and maybe more attractive places to invest money than Bitcoin.
Warren Buffett’s optimism regarding a stock market recovery
Warren Buffett’s investment style requires an optimistic view on the chances of a long-term stock market recovery occurring. He’s historically bought high-quality companies when other investors want to sell them.
In doing so, he buys them at low prices that don’t necessarily reflect their quality. In order to profit from such purchases, he generally requires an improvement in their financial performance that’s often catalysed by an economic recovery. Similarly, improving investor sentiment can help value investors to make gains. Stocks that were unpopular during an economic crisis can become extremely popular as investors become less risk averse.
The potential for a stock market rally
Of course, Warren Buffett’s right to have an upbeat view on the long-term prospects for a stock market recovery. History shows that indexes such as the FTSE 100 and FTSE 250 have never failed to recover from even their worst periods. For example, the FTSE 100 started life in 1984 at 1,000 points. Since then, it has experienced bull markets and bear markets. But it has also consistently made new record highs over the long run.
Although at the present time it’s yet to recover from the 2020 stock market crash, a large amount of stimulus is likely to make that task easier. A prolonged period of low interest rates, quantitative easing and government support programmes are likely to lead to improving investor sentiment. In turn, that can lead to a stock market recovery over the coming years.
An uncertain outlook for the Bitcoin price
Warren Buffett has historically been positive about the prospect of a stock market recovery. But he has been consistently negative about Bitcoin in recent years. The virtual currency has limited utility, and faces regulatory threats that could harm investor sentiment. Since its price is based entirely on investor sentiment, its recent price rises could come under pressure over the long run.
As such, buying a diverse range of shares and holding them for the long run could be a more profitable move. This strategy has served Warren Buffett well over many decades. That’s because a stock market recovery has always followed even the very worst declines.
The post Forget Bitcoin! I’d listen to Warren Buffett and invest in the stock market recovery appeared first on The Motley Fool UK.
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Motley Fool UK 2020