At the ripe old age of 91, Warren Buffett has witnessed more than one market crisis in his long life. Despite this, he has managed to become one of the world’s wealthiest individuals, owing to his calm analysis and ability to find top-notch stocks. That, I believe, qualifies him as someone worth listening to in times like these.
Focus on the business
Warren Buffett is a firm believer in the necessity of sound business principles. Observing a stock’s rise and fall is, for the most part, frustrating, draining, and unproductive. Many inexperienced investors make the mistake of purchasing when prices rise and selling when they fall. However, a whole host of factors influence share prices in the short term. Not only is it hard to forecast these fluctuations, but they typically reveal little about a company’s health.
If, on the other hand, an investor learns how much debt a firm has, how much cash it has on hand, and whether it makes a consistent profit, they will be in a much better position to determine whether the company is healthy or not.
That doesn’t necessarily mean that Buffett would invest right away. He still believes in paying a fair price for a stock.
How Buffett gets a fair price
It can be thrilling to watch markets trending upwards. Often it can seem like the good times will never end and that we need to invest as much as possible. But the good times rarely last and many inexperienced investors will find themselves watching in terror as the market and their investments, fall in value. Warren Buffett believes this period presents an opportunity.
“Be fearful when others are greedy, and be greedy when others are fearful.”
Simply put, Buffett believes that when markets are down that’s when we should be making stock purchases. When markets are surging, this advice is inverted.
Going against the grain is never easy, especially when stock values are down. So, one of the ways I attempt to get around this is to be greedy in instalments. In other words, rather than seeking to buy at the absolute bottom to maximise my returns, I make several acquisitions of solid UK equities.
This makes things much more bearable from a psychological standpoint. It also prevents me from becoming paralysed by indecision and missing out on a terrific chance.
That’s not to say Buffett only buys when markets are down. He has made very few purchases throughout the pandemic. But Berkshire Hathaway, the company Buffett runs, is currently sitting on over $140bn in cash. This could imply that he believes a big crash is coming and that when it arrives, he intends to go shopping.
Time is on my side
Knowing that I want to stay invested for decades lessens the pain of market downturns.
This mindset also offers me an advantage over expert investors. Unlike them, I’m not compelled to justify my decisions or meet a quarterly goal to maintain my job. To put it another way, their chosen professions force these unquestionably gifted people to do everything Buffett warns against. They are compelled to become impatient.
It is because of this dedication to focusing on the long-term objective that I can withstand a crash or correction.