Sometimes the stock market can move around in fairly dramatic ways. There has been no shortage of that over the past couple of years – and I expect more to come. During a stock market correction, I apply some Warren Buffett tips to help me turn a potentially alarming event into a buying opportunity for my portfolio. Here are three practical tips from the Sage of Omaha that I use.
Buy quality on sale
Buffett started out doing what is known as value investing. Value investing is a strategy that tries to buy companies that have seen their prices fall far below what they are worth.
A lot of investors do well with a value-based approach – so why did Buffett abandon it? Basically he decided he could do better by focussing primarily on the quality of a company rather than its share price. He summarises that approach by saying he likes to buy great companies at good prices.
But often, lots of investors want to buy shares in great companies. That can push their prices up.
A stock market correction offers me the opportunity to buy some quality companies at a price I find attractive. I think it can be helpful to keep a shopping list of shares I would want to buy, if they became available at an attractive price. For example, names on my list include Diageo, Judges Scientific, and Spirax-Sarco. If their share prices fall to the right level, I would buy them for my portfolio.
Warren Buffett thinks big
Buffett thinks the mistake many investors make is not that they do too little in the stock market, but that they do too much.
Although he reckons there are quite a few good shares available, finding great ones is much more difficult. Instead of buying lots of good shares, Buffett tries to focus on just a few great ones. But when he buys them, he does it on a big scale. If an idea is promising, he wants to expose himself to it in a big way.
A stock market correction can be overwhelming, because so many shares draw one’s attention. Like Buffett, I try to focus on just a small number of potentially great investments. But if I like them, I think it could be worth putting them into my portfolio on a substantial scale. Like Buffett, though, I could be wrong — so I always keep my portfolio diversified.
Never lose sleep
Warren Buffett does not lose sleep over his investments. He says, “I will not trade even a night’s sleep for the chance of extra profits”.
A stock market correction can be a very stressful time for many investors. They lose sleep and worry a lot about what share price falls might mean for them. I think Buffett’s wisdom here is practical and useful. It makes sense to choose shares for my portfolio and invest in a way that does not keep me up worrying at night.
The way I try to do that is only investing what I can afford. I focus on buying great businesses at attractive prices that I would be happy to hold for years if necessary. That is very different to trading shares hoping for a short-term boost in share price independently of how well the underlying business is performing.