It might seem intuitive that your job as an investor is to avoid corrections. However, legendary investor Warren Buffett has a different perspective.
“If you worry about corrections, you shouldn’t own stocks,” he once said in an interview with The Street. “It’s a terrible mistake to think of stocks as something that bob up and down.”
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But how is an investor expected to make money while ignoring stock market corrections that can have devastating effects on asset prices?
Here’s a closer look at the nuances of Buffett’s investment approach.
Time horizon
One of the keys to Buffett’s success as a stock investor is his unusually long time horizon. He tends to hold onto stocks for several decades. He still holds shares in American Express, for example, which he first purchased in 1991.
By holding stocks for extended periods, Buffett is effectively riding out the market cycle. For instance, there have been several market corrections since 1991, including the 2001 dot-com bubble, the 2008 financial crisis and the 2020 pandemic scare. American Express dipped in each of those corrections, but eventually bounced back. According to The Washington Post, Buffett’s initial investment in the company was agreed upon in late July 1991. Since then, the stock has gone up around 3,700% — a robust return despite the drawdowns along the way.
This is true for the broader market, too. The S&P 500 has delivered an annual growth rate of 10.32% from 1957 through 2023, according to Official Data. Over those 66 years, it would have been difficult to predict or avoid recessions and corrections. However, if you held for an extended period your chances of losing money would have been greatly reduced.
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Calculations by Capital Group indicate that the longer you hold stocks the lower your chances of losing money. If you hold an index fund for one year, for instance, your chances of a negative return in that period is 27%. This risk is reduced to 16% if you hold for three years or more and reduced further to just 6% if you hold for 10 years.
This is why professional investors like Buffett focus on expanding their time horizon as long as possible. Based on this strategy, corrections could actually work in your favor.
Corrections can be opportunities
Buffett has often compared buying stocks to buying groceries. In another interview with Becky Quick of CNBC, he said a drop in stock prices actually works in his favor.
“We are a net buyer of stocks over time. Just like being a net buyer of food. I expect to buy food for the rest of my life and I hope that food prices go down tomorrow.”
This is a unique perspective on stock prices. While most investors panic and sell during market corrections and the media is filled with gloomy headlines, Buffett jumps in the pool and buys stocks when they’re cheap. This amplifies his long-term returns.
To be successful as a retail investor, you may need a similar philosophy. Extending your time horizon and risk tolerance could improve your investment outcomes over time.
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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
Source Agencies
