Volatile markets can be challenging. As an investor, I know it can be difficult to hold on to investments when market volatility causes share prices to drop. But selling investments in a downturn would be the worst thing that I could do for my investing goals. With that in mind, here are five pieces of advice from Berkshire Hathaway Chairman Warren Buffett that I use to help me hold on when market volatility makes selling tempting.
1. Buy at the right price
Buffett’s most important advice is to invest in stocks when they trade at a discount to their intrinsic value. If I buy a stock above its intrinsic value, then I have no reason to think that someone should ever pay more for it than I paid. That makes it hard to hold onto the stock when market volatility is high and prices fall. If I buy at a discount to intrinsic value, though, I can be confident that I’ve made a good investment that I can hold onto for the long term.
2. Think like a business owner
Buffett also advises focusing on owning businesses, rather than stocks. In other words, I should look to make investments based on what I think the business will produce, not what the stock price will be. Following this advice helps me cope with market volatility. A short-term change in share prices doesn’t change what the underlying business is producing. So if my investment thesis is based on the business, not the stock price, it isn’t affected by market volatility.
3. Know what I own
Staying within what Buffett calls my circle of competence makes it easier for me to navigate market volatility. It’s important for me to invest only in things where I understand the economics of the business and the the industry that it’s in. When the price of something I own drops sharply, it’s a sign that the market disagrees with me about its intrinsic value. When this happens, it’s important for me to be confident that it’s a good investment and I can only be confident of this when I’m investing in something that I can understand.Â
4. Delay gratification
According to Buffett, markets are much more predictable over a long period of time than over a short one. When I invest, I do so with an anticipation of where the business will be 10, 20, or 30 years in the future. Market volatility might cause anything to happen to stock prices in the short term. But keeping in mind the fact that short-term movements are not part of my investing thesis helps me to not worry about price fluctuations brought on by market volatility.
5. Focus on what I can control
Market volatility is not something that is under my control. I can’t make stock prices go up or down. When markets are volatile, I find it helpful to think about Buffett’s advice for inflationary periods. Buffett advises that the best thing to do when inflation is high is to concentrate on my own earnings power. With that in mind, I try to focus on maximising my income and keeping my expenses under control, instead of looking at how my investments are performing when market volatility is high.