We now know what type of businesses that Warren Buffett likes and how to determine if the business is in good financial health but even buying a winning stock at a high price can be disastrous. Warren Buffett only buys when it is a bargain to buy shares of stock in a company he really likes. He does his homework and identifies profitable businesses, and then he waits patiently for the perfect buying opportunity to snatch up shares of these profitable companies. In this section, we will discuss some of the events that can cause a bargain buy-in opportunity.
Temporary Problems
Once in a while, even a great company will get into some unfortunate event which will generate negative news. As a result of the negative news, the short-sighted majority of people will sell their shares. The challenge is to determine if the unfortunate trouble that the company has stumbled upon is a temporary problem or a long-term one. If you determine that it is temporary and the business can recover, then swoop in and buy all the shares of that company’s stock that you can. When the situation corrects itself, the stock price will rise again. This skill is something that comes naturally with practice and experience.
Stock Market Corrections
Sometimes when the stock market goes through a correction, the crowd panics and sells like crazy because they are nervous of another stock market crash. Unless it is near the end of the bull market bubble, these price drops are temporary and will rise again when the crowd regain their senses. The correction essentially hasn’t changed the underlying core business of companies but now their stock prices are at bargain prices equating to fantastic buying opportunities for value investors.
Industry Recession
In an industry recession, all the companies of the industry will see their earnings and stock prices drop. This is normal and recoverable. A great buying opportunity occurs when the general public doesn’t see this fact and they sell a company like crazy because they believe that the stunted earnings and price drop are signs of doom.
Structural Reorganization
From time to time, a business may decide that it needs to restructure such as spinning off a business, or changing from corporate form to partnership form. These changes produce expenses that are a negative impact on the share price. The short sighted public may see the share price drop and run, presenting a great buying opportunity for long-term investors like Warren Buffett and yourself. The expenses are a temporary setback that often produces even greater gains in the future.
War
The possibility of war will cause stock prices to fall. Everybody becomes very pessimistic and sells. This creates great buying opportunities because the businesses themselves haven’t changed one bit but they are cheaper to buy now. For example, in the September 11th terrorist attack, travel companies saw their stock prices hammered as a result of massive disruption. Nobody wanted to travel but it’s silly to assume that people will never travel again. When the travel industry begins to recover, the stock prices will rise again.
These situations have presented Warren Buffett with fantastic buying opportunities that have made him millions time and time again. It’s not the entire list but they are the basic ones.
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