Get Ready for the Next Bull Market, Warren Buffett Style

We don’t know when the next bull market will arrive. And right now, with the market in the doldrums, it may feel very far away. But don’t despair. Throughout time, bear markets always have led to bull markets. The best thing you can do right now is prepare for those better times.

How? By following in the footsteps of an expert. I’m talking about billionaire investor Warren Buffett. He’s been through crashes and bear markets. And that hasn’t stopped him from delivering top performance over time. So let’s take a look at how we can use Buffett as a model — and prepare for the next bull market.

Looking for opportunity

One of the first things to note is Buffett doesn’t allow market sentiment to drive his investment choices. He doesn’t get overly excited about investing during a bull market and turn away from stocks during a bear market. Instead, Buffett looks for opportunity no matter what the general market is doing. And that often leads him to invest heavily during down markets, when he can scoop up stocks for dirt cheap valuations.

In Buffett’s letter to Berkshire Hathaway shareholders in 2009, in the wake of the 2008 financial crisis, he wrote: “We’ve put a lot of money to work during the chaos of the last two years. It’s been an ideal period for investors: A climate of fear is their best friend. Those who invest only when commentators are upbeat end up paying a heavy price for meaningless reassurance.”

Last year, the three major benchmarks all touched bear territory. Though Buffett ended 2022 with more selling activity than buying activity, he still added to some positions or opened new ones during the year. In the fourth quarter, for instance, he added to shares of Louisiana-Pacific (LPX -2.77%) after initiating a position in the previous quarter.

To prepare for a bull market, Buffett takes advantage of the one huge gift a bear market offers us: and that’s the opportunity to get in on solid companies at a good price. This is the best way that we, too, can get ready for better days.

Right now, opportunities exist throughout industries. In many cases, companies’ earnings have dropped due to economic headwinds. In other cases, market sentiment has hurt them — even if earnings have held up. Like Buffett, it’s important to ignore noise in the market that could make us too pessimistic or optimistic. Instead, favor looking at a company’s prospects over time.

Amazon and Costco

Amazon (AMZN -1.90%) — a Buffett holding — is an example of a company that’s struggled with economic headwinds — yet still offers a bright future. Higher inflation has increased costs and weakened customers’ buying power. As a result, Amazon’s earnings reports have been far from bright over the past year.

That said, the company is improving its cost structure. It continues to report rising revenue. And it remains a leader in the two high-growth businesses of e-commerce and cloud computing. Today, Amazon shares are trading at their lowest in relation to sales since 2015.

AMZN PS Ratio Chart

AMZN PS Ratio data by YCharts

As for market sentiment, it’s hurt many consumer goods companies regardless of their earnings performance. Costco (COST -0.68%) is an example. It’s continued to report rising earnings — in spite of today’s economic climate.

That’s thanks to a business model that is particularly helpful during tough times. Shoppers keep coming back to Costco for two big reasons: First, they’ve paid an annual membership fee, so they want to get their money’s worth. (Importantly, this fee equals profit for Costco since it’s high margin.) And second, Costco offers dirt-cheap prices on essentials such as groceries and gas. Today, Costco shares are trading at 33 times forward earnings estimates — down from more than 45 a year ago.

So, to prepare for a bull market, the best thing to do is avoid focusing on the ideas of “bear market” or “bull market.” Don’t let these market phases determine whether you buy or sell. Instead, get ready for the next market phase by investing in companies with solid prospects — and scooping them up at a fair price. This is the best way to prepare for the long term, Buffett style.

John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Adria Cimino has positions in The Motley Fool has positions in and recommends, Berkshire Hathaway, and Costco Wholesale. The Motley Fool has a disclosure policy.