The US S&P 500 index is down by 8% so far this year. The tech-heavy Nasdaq index is down 12%. Popular stocks such as Netflix and Rivian are down by around 35%. Are we about to see another stock market crash?
I don’t know what will happen next. But what I’ve seen so far this year is that corporate earnings seem fairly stable. Although inflation is a concern, I see that as a good reason to invest in stocks — good companies can increase their prices to protect against inflation.
For these reasons, I plan to follow Warren Buffett’s example and stay invested in stocks this year.
Quality vs hype
Buffett was mocked in 2020 and 2021 when shares in his company Berkshire Hathaway lagged badly behind more speculative funds such as Cathie Wood’s Ark Innovation ETF. But the so-called ‘Sage of Omaha’ has been in this business a long time. He sat tight and focused on investing in good quality businesses with durable earnings.
Funnily enough, Berkshire shares have risen by 30% over the last 12 months. The ARK Innovation ETF has fallen by 50% over the same period. Berkshire’s returns are now broadly equal to those of Ark since the start of the pandemic.
It’s a similar story for the best of the big tech companies. For example, Apple and Google are down by around 10% so far this year. But they’re both still trading significantly higher than they were a year ago.
I think the market shakeout we’re seeing now is likely to affect speculative growth stocks more than more mature, profitable businesses. Many of the falling stocks were priced at sky-high valuations six months ago, even though some of them weren’t making any money.
After such rapid gains, I think it’s natural to expect a correction. In my view, that’s what we’re seeing now.
What I’m doing today
One mistake I made in the 2020 crash was to start buying too soon. Stocks continued to fall for longer than I expected. I don’t think the current market slump is over yet. Some of the UK shares I own have hardly moved at all.
I don’t know what will happen next, but I don’t want to be a seller if prices keep falling. What I’m doing now is reviewing each of the shares in my portfolio. I want to make sure I’m happy with the fundamentals and the outlook for each business.
If I’m comfortable with the situation, then I’m not going to worry about short-term share price movements. In my experience, good businesses that produce reliable profits usually find the right level. I plan to use any short-term share price falls as a buying opportunity, rather than a reason to sell.
Buffett says that when he’s able to buy shares in good businesses at a reasonable price, then his favourite holding period is “forever”. That’s my aim too.
I’ll only sell if I change my view on an investment. Right now, I’m sitting tight.