What Warren Buffett and Other Smart Investors Know About Buying Stocks in a Bear Market

The legendary Warren Buffett once wrote: “A simple rule dictates my purchases: be afraid when others are greedy and be greedy when others are afraid. He shared this timely advice in the midst of the Great Recession in 2008, which makes it particularly relevant right now.

Inflation has hit the US economy this year, reaching levels not seen in four decades, and the Federal Reserve is raising interest rates so aggressively that many economists and financial experts see it as a recession on the horizon. These ominous events sent the stock market plummeting. The S&P500 and the Nasdaq Compound have now declined for three consecutive quarters – this had not happened since 2009 – and both indices have fallen in a bear market.

Here’s what investors need to know.

Advice from Warren Buffett, Shelby Davis and Peter Lynch

Shelby Davis is one of the most successful investors in history. Davis was in his late thirties when he started investing in 1947, and he managed to turn an initial sum of $50,000 into $900 million by the time of his death in 1994. Davis battled eight markets bearish throughout his career, and he saw his portfolio decline by 60% at one point. But Davis treated those downturns as buying opportunities. In fact, he once said, “You make most of your money in a bear market; you just don’t realize it at the time.”

Peter Lynch is another well-known investor. He managed the Magellan Fund at Fidelity between 1977 and 1990. This 13-year period was characterized by two bear markets and six market corrections, but Lynch doubled the performance of the S&P 500, achieving an annualized return of 29.2%. He once gave this advice: “A correction is a wonderful opportunity to buy your favorite companies at a bargain price.”

Warren Buffett, Shelby Davis and Peter Lynch all have one thing in common. They know slowdowns are a great time to buy stocks. But not all downed stocks are worth buying.

In his 1995 letter to shareholders, Buffett explains his thinking: “In business, I seek economic castles protected by impassable moats. All investors should follow this advice and Microsoft (NASDAQ: MSFT) is a great example.

Microsoft is a resilient company protected by a strong moat

Microsoft’s broad portfolio of software products and cloud services has helped it cultivate immense brand authority. In fact, Brand Finance named Microsoft the fourth most valuable brand in the world in 2022, and ranked CEO Satya Nadella first among chief executives.

Microsoft recently announced its results for the first fiscal quarter of 2023 (ended September 30, 2022). Revenue soared 11% to $50 billion, but guidance fell short of expectations due to macroeconomic headwinds. This drove the stock down. Microsoft has now seen its share price fall more than 30% this year, marking its biggest loss in value at any time in the past decade.

Investors need to see the big picture. High inflation and unfavorable exchange rates are temporary problems, and Microsoft is a resilient company protected by an arsenal of mission-critical applications. Office365 is the benchmark for productivity, but other software products have also gained a strong market presence, such as Dynamics 365 in enterprise resource planning, Teams in communications, and Power BI in business intelligence. .

Even better, Microsoft has been recognized as a leader in several categories of cyber security software, and that part of his business is growing like wildfire. Security revenue soared 40% in fiscal year 2022 (ended June 30, 2022) and the number of Microsoft security customers soared 33% to 860,000 in the last quarter. Going forward, the cybersecurity market is expected to grow 12% per year through the end of the decade, according to Grand View Research.

It should also be noted that Microsoft Azure is the second largest cloud service provider and the company has gained market share. According to Canalys, Azure accounted for 24% of cloud infrastructure spending in the June quarter, up from 18% three years earlier. This bodes well for Microsoft. Cloud computing spending is expected to grow 16% per year through 2030, according to Grand View Research.

Simply put, investors have reason to believe Microsoft can sustain double-digit revenue growth for years to come, and with shares trading at 25.4 times the earnings — a windfall over the three-year average of 32.2 times earnings — this growth stock worth buying in a bear market.

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Trevor Jennewin has no position in the stocks mentioned. The Motley Fool holds positions and recommends Microsoft. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Robert D. Coleman