The investor Warren Buffett is in his nineties and started buying shares while he was a schoolboy. That gives him a huge advantage over many other investors – he has vast, deep experience of the stock market both at its highs and lows.
That is why Buffett has been able to navigate market volatility many times in his long career while still achieving outstanding long-term performance in his portfolio.
At a time of heightened market volatility, here are three of Warren Buffett’s classic moves I am applying to my own portfolio.
Focus on the investment case
Buffett owns shares that have seen big price swings in stormy markets. Take Coca-Cola as an example. Between February and March 2020, as the pandemic took centre stage, the drink maker lost 36% of its value.
In other words, if Buffett had sold the shares, held the money for a month, and then reinvested in the same company, he could have increased the size of his stake by over a third. Instead, he did nothing with his Coke shares that month. In fact, he has done nothing with them for decades except hold them.
That is because when Buffett buys shares, he is investing in what he sees as a compelling investment case for the long-term. Once he owns them, he tends to keep them for as long as he believes in that underlying investment case. He does not try to time the market, or focus on short-term price swings even if they could make him a big profit. Buffett is not a trader, but a long-term investor.
Warren Buffett spreads risk
Buffett is recognised as one of the great stock pickers of his and perhaps any generation.
So, why does he end up owning some stocks that perform poorly? When he dumped his Tesco position in 2014, for example, he lost almost half a billion dollars. The reason Buffett owns some shares that perform poorly is the same reason he does not put all his money in one share that has performed very well for him, like Apple. It is because Buffett never knows what will happen to a share in future. Neither does anyone else.
Of course, Buffett has theories about what he thinks should happen to a share. He also has thoughts about what he hopes will happen. But unexpected events can change the fortunes of even the best-run companies. That is why Buffett diversifies his portfolio across different shares and business sectors. If market volatility pummels a share he owns, the overall impact is reduced by having a diversified portfolio. The same is true for me — and any other investor.
Keeping calm
Finances can be a big source of worry for people. Many investors have sleepless nights fretting about the impact market volatility may have on their portfolio.
Not Warren Buffett. For him, the chance of bigger gains is not worth even one night’s interrupted sleep. As he says, “When forced to choose, I will not trade even a night’s sleep for the chance of extra profits”.
Keeping calm during market volatility is about one’s state of mind. But, like Buffett, I can build my portfolio to help me achieve the state of mind I desire.
Christopher Ruane has no position in any of the shares mentioned. The Motley Fool UK has recommended Apple and Tesco. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
