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The events of the last few weeks with the failure of some large banking institutions have led some to draw comparisons to the global financial crisis of 2008. While I don’t agree that we are heading to such depths, I do believe that bank stocks could be under pressure. in the short term. Legendary investor Warren Buffett was very smart to deal with this in 2008, this is how I am going to try to copy him in 2023.
What Buffett did during the last crisis
In 2008, bank stocks were falling rapidly. With firms like Lehman Brothers going bankrupt, almost every financial services company was caught in the crossfire. Buffett took advantage of the uncertainty at the time by buying $5 billion of Goldman Sachs stock.
When this stake was sold in 2011, Buffett made a profit of $3.7 billion. This was quite a comeback! However, when I think about it, that size of profit was necessary to offset the risk that was being taken. It was clear that he thought the share price was too low and too much fear was being generated in the bank’s value. As a result, when the crisis has subsided, it is natural for the stock price to return to fair value.
Investment return aside, it’s interesting that Buffett chooses to be selective in buying Goldman Sachs stock. There are countless other bank stocks that he could have bought. However, Goldman Sachs has a long history and was arguably one of the safest banks (if that were possible!) to buy during the crisis.
How can I copy this time
To be clear, I don’t have $5 billion that I can afford to invest in a bank right now! However, I don’t feel like the amount of money involved really matters. It’s more about the mindset I want to copy.
At the moment, bank stocks are struggling. For example, him barclays the stock price has fallen 19% over the past month. During the same period of time, HSBC has dropped 9% and Lloyds Banking Group it is down 7%. The broader one-year performance can be seen in the chart below.
The way I want to copy Buffett is to buy when there is uncertainty in the air and stocks are falling. This goes against normal human nature. You may want to wait until all is well again and the market starts to recover. However, if I do this, I will likely miss out on some of the potential profit. Actually, I need to buy in the near future for a chance to make a big profit.
This carries risks, of course. The main problem is that the stock could continue to fall after you buy it. However, this ties into another point from Warren Buffett. He wasn’t looking to trade his bank stock a month after he bought it. In the previous case, he occupied it for three years. So having this long-term investing mindset will help me stay calm even if stocks continue to fall in the coming months.
I am looking to buy shares in the banking sector in the coming weeks.
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