Stock markets have been rather volatile in January. Both the S&P 500 and the FTSE 250 are showing losses of over 6% so far. It’s slightly better over one year though, particularly for the S&P 500, which is up almost 15%. But volatile markets bring me to Warren Buffett, perhaps the most famous investor around. When stock markets are falling, like they have lately, I always refer back to one of his investing insights: “Be fearful when others are greedy, and greedy when others are fearful.”
I think this is certainly appropriate today. There could be some excellent bargains to snap up as fear grips stock markets. Here’s how Buffett himself has followed his own advice, and how I am too.
Setting the scene: Berkshire Hathaway
Berkshire Hathaway is Warren Buffett’s investment company. As the CEO, he aims to buy quality businesses and then hold them for a long time. In fact, Buffett once said: “Our favourite holding period is forever.” Berkshire has held some companies for decades, such as Coca-Cola. There have been many stock market crashes over the years, and still Buffett didn’t sell his Coca-Cola shares.
The last time investors were truly fearful, at the Covid-related market low in March 2020, Buffett was looking for cheap shares. He bought Bank of America back then, and since, the stock has almost doubled. That’s a superb return, just because Buffett was being greedy and buying the shares when others were fearful of them.
How I’m being greedy
So, the first thing I’m going to do is look for stocks in the FTSE 250 that may have declined too far. I could look at the price-to-earnings (P/E) ratios of the stocks to see if they’re now lower than historical averages. As long as the companies are trading well, then there’s a good chance my capital can grow when the share prices recover.
I also invest to generate passive income. To do this, I buy stocks that pay a dividend. If stock prices have declined but the company still pays its dividend, then the dividend yield will have risen. Therefore, I’d look to buy stocks today with higher yields as the stock market has fallen.
In either case, it’s important I also understand the company before I buy any of the shares. There could be a very good reason why the share price has declined, so I always read the most recent financial results before I invest. If nothing fundamental has changed with the company, then I may be greedy and snap up some cheap shares when the price falls.
A final Warren Buffett quote
Investing is not without risk. I could certainly lose more than I make as stock prices can be volatile. But if I take a long-term view, then stock markets do generally rise over time. This brings me to another of Warren Buffett’s insights: “If you aren’t thinking about owning a stock for 10 years, don’t even think about owning it for 10 minutes.”
So, I’m looking to be greedy as markets fall, but also take a long-term view as I invest in quality UK companies that may now be cheaper.