At the ripe age of 91, Warren Buffett is still active in investing. There’s no reason why he shouldn’t be, given his strong track record of picking winners over several decades. His experience is also invaluable as he’s lived and invested through many economic cycles, including market crashes. Given the current wobble in the markets that we’re seeing, here are a few of his pointers that I’m trying to follow.
Buying the dip
Warren Buffett has been quoted as saying that “whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down”. A stock can be marked down when it’s trading at a historically low level. Given the fact that the Nasdaq index is down over 10% so far this year, there are plenty of companies trading on the low side.
Buffett uses a slump to buy not just any stocks, but quality ones. After all, there’s no point me buying stocks during a crash that are going to struggle for years to come. Obviously, this isn’t an easy one to call. Recently, I wrote about four of my favourite stocks that I’d buy if we saw a further crash.
Don’t panic
Another great point from Warren Buffett is that “the sillier the market’s behavior, the greater the opportunity for the businesslike investor”. Often during a market crash, emotion takes over for a lot of investors. It’s tough to see high unrealised losses from stocks that I own and not to panic. This can often trigger more selling activity, pushing prices down to irrational levels.
It’s clear that Buffett doesn’t panic during these periods of extreme uncertainty. He acts in a businesslike way, in effect taking out emotion from the picture. For me, it’s a reminder to keep a cool head. It’s also a reminder to actually flip the negative into a positive and to see a crash as a good opportunity to buy cheap stocks.
Following Warren Buffett in being patient
Finally, I can learn from the point that “no matter how great the talent or efforts, some things just take time. You can’t produce a baby in one month by getting nine women pregnant”.
During a market crash, I might have to sit tight for several months before the market recovers. For example, the FTSE 100 only recently broke back above levels seen before the pandemic hit. Some things simply take time. So during a crash, I need to temper my expectations of how long I might need to hold some stocks that are showing a loss for me.
Something that can help me in this regard is if I have some allocation to top dividend stocks. Even if the share price might be falling, I can still generate income from the dividend payments during this time. I think this is a great tool to use as part of my overall stock portfolio.
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Jon Smith and The Motley Fool have no position in any of the shares mentioned. 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.
