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Image source: The Motley Fool
The events of the past few weeks with the failure of several large banking institutions have led to some comparisons with the global financial crisis of 2008. Although I do not agree that we are going to the bottom, I feel that banking stocks may be under pressure in the short term. Legendary investor Warren Buffett was very good at solving this problem in 2008, so I will try to copy him in 2023.
What Buffett did during the last crisis
Back in 2008, banking stocks fell rapidly. With companies like Lehman Brothers on the verge of bankruptcy, almost all financial services firms are caught in the crossfire. Buffett took advantage of the uncertainty at the time by buying $5bn worth Goldman Sachs stock.
When this stock was sold in 2011, Buffett made a profit of $3.7 billion. This is quite a return! But when I think about it, the size of the profit is needed to balance the risk involved. He clearly thought the share price was too low and feared the value of the bank. As a result, when the crisis is over, it is natural for stock prices to return to their fair value.
Aside from the investment return, it is interesting that Buffett chose to be selective in buying shares of Goldman Sachs. There are many other banking stocks to buy. But Goldman Sachs has a long history and is probably one of the safest (if possible!) banks to buy during a crisis.
How can I copy this time
To be clear, I don’t have $5bn to invest in the bank right now! But I don’t feel the amount of money they make really matters. It’s more about the mindset you want to emulate.
At the moment, banking stocks are struggling. For example, in Barclays The stock price is up 19% over the past year. At the same time, HSBC it is down 9% and Lloyds Banking Group it is down 7%. The broader one-year performance can be seen in the chart below.
The way I like to copy Buffett is to buy when there is uncertainty in the air and stocks are down. This goes against normal human nature. Maybe I’d rather wait until things get better again and the market starts to rally. But if I do this, I lose some potential benefits. In fact, I have to buy in the near future to stand a chance to make a big profit.
This carries no risk, of course. The main problem is that the stock may continue to fall after I buy it. But this is related to another point from Warren Buffett. They don’t want to return the banking stock a month after buying it. In the above case, he held for three years. So having this long-term investment mindset will help me stay cool even if stocks continue to decline in the coming months.
I plan to buy banking sector stocks in the coming week.
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