Investing in a Down Market: Learnings From Warren Buffet and Other High Profile Investors

2016 is looking pretty bleak so far for investors, with signs pointing to continued volatility down the road. After only two months into the New Year, the S&P 500 is down about 11% since its record high performance in May of last year, marking its weakest start to date since 2009. Similarly, the Dow Industrial Average continues to struggle, shedding points amid concerns over global growth and heightened market volatility. Corporate earnings have also been lackluster, registering a third consecutive quarter of year-over-year declines. With oil prices plunging, the dollar rising and demand for Treasuries increasing, it's no wonder January ended without any new initial public offerings (IPOs), which last happened in September 2011.

Amidst all this doom and gloom, investors are in search of some guidance for how best to weather this storm, looking to strategies employed by financial gurus like Warren Buffet, who has beat the market during corrections and recessions, for ideas. This article will provide an overview of the macro economy and provide insight on investment opportunities to watch and avoid in these market conditions.

Global Market Overview. According to a recent report by Citi, in which the bank warned that the global economy seems to be "trapped" in a "death spiral," the market outlook does not look very promising in the year ahead. More specifically, the report forecasts weak global growth, which will spur demand for the U.S. dollar. This in turn will likely drive down the global price of commodities, which will hurt developing economies and further weaken global growth. From there, we will see an increase in demand for the U.S dollar, which will cause low oil prices to continue to crumble. While oil prices remain the lynch pin in the potential downturn that could be approaching, the Citi report expects oil producers to cut costs and production, which would allow them to find stable ground and thus hinder a looming recession.

On the policy side, the Fed did raise interest rates in December in an effort to stimulate global growth, but the dollar still remains strong, even as interest rates remain close to zero. There's been speculation among economists that the Fed could possibly experiment with negative interest rates (a measure employed recently by Sweden's central bank) but that seems unlikely since Janet Yellen just increased interest rates despite low inflation.

The January jobs report (announced in early February) fell below expectations too, with employers adding only 151,000 new jobs to date this year. This underscores the slowing domestic growth of the U.S. economy, but amongst its peers the U.S. economy still remains relatively stable.

Adding more worry to the fire is the fact that this year is an election year, which increases uncertainty amongst investors, who grow concerned about policy changes that could come into effect once a new leader is brought to the helm. Historically, there has been a negative correlation between stocks and election years, but it is still early on in the election to know what kind of impact this will have on the U.S. economy down the line.

Finally, for companies looking to list on the public markets, IPOs could fall significantly in comparison to past levels recorded, say private equity experts. Of course this downturn in activity is a deep departure from prior years, given that January 2015 saw 14 companies begin trading, with 170 total IPOs recorded in 2015 and 275 in 2014. While it is expected that most companies will hold off on going public until a calm is seen in this economic storm, venture capitalists continue to have cash available on the sidelines to fund well performing companies that are interested in listing this year.

Three Tips for Investors Going Forward. Against that backdrop, the wisdom and prowess of financial experts like Warren Buffet might provide some guidance to investors as the look for opportunities in the year ahead.

Below are three tips for investors to consider when making investment decisions, which take into count the economic headwinds that are currently in motion as well as learnings from leading players in the game:

  1. Invest "Defensively" - Warren Buffet has a history of beating the market during market crashes and corrections. When making an investment, Berkshire looks for companies that have low debt, are "forever" businesses that will be around in 50 to 100 years no matter what, and those that have a significant competitive advantage over competitors. While this type of defensive strategy is cautious, but could buffer against the downside risks of investing in a volatile market.

  • Don't bail out of stocks because of last quarter's earnings - The old adage, slow and steady wins the race, should be applied to investment strategies during these tumultuous economic times. By some estimates, the profits for the fourth quarter are off by about 6% from those recorded at the same time last year, but this drop was led by the energy sector, which was down 60%. If oil prices improve later on this year, there could be a bounce back on quarterly earnings down the line. So investors should stay the course and not sell stocks that have underperformed after these past corporate earnings.
  • Sectors to Watch - There's been a shift toward service-focused companies in the U.S., which have remained stable during the current economic climate. As such, companies such as restaurant and hotel chains, cloud-computing concerns, professional-services firms and financial companies are ones to watch in terms of potential investment opportunities.