The stock market’s ups and downs can rattle even the steadiest investor. While everyone hopes for gains, losses are inevitable. But legendary investor Warren Buffett once offered a refreshing perspective on how to handle those downturns.
“I love it when the things we buy go down. I get euphoric — you know the stocks are down today and I’m buying more of something I was buying yesterday — I’m buying it cheaper,” he said during an October 2014 interview with Fortune Magazine.
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Buffett’s approach offers a different way to view those unsettling red numbers in your brokerage account. He likened it to grocery shopping, where finding items at a reduced price is seen as a win. Yet, when it comes to stocks, most investors don’t apply the same bargain-hunting mindset.
“They think that the stock knows more than they do, so that when the stock goes down, they say the stock is telling them something … they take it as kind of a referendum on themselves, me versus the stock: ‘If it ever gets back to what I paid, I’m going to sell it,’” he observed.
A drop in stock prices, for Buffett, signals the chance to get more for his money.
The only question you need to ask
Buffett emphasized that the stock market is indifferent to an individual’s investments, adding that worry about how a stock performs, relative to its purchase price, is futile.
“Stock doesn’t care what you paid, you have to remember, the stock doesn’t even care that you own it,” he said.
But Buffett acknowledged there’s one question that needs to be asked by investors: Can I get more for my money someplace else?
“You’ve got a chance to be in thousands and thousands of great businesses, and their prices change all the time, so their relative valuations change,” he added.
Indeed, there are thousands of companies listed on U.S. stock exchanges, and thanks to minimal commission fees, investors can readily shift their capital to where they see the best value.
The significant advantage for modern retail investors, as opposed to historical business magnates, is that they can always shift from one business to another.
“You have a huge advantage over Andrew Carnegie,” Buffett said. “When he was in the steel business, he was in the steel business, or Rockefeller was in the oil business; he could not shift over immediately to retailing.”
This flexibility is starkly contrasted with the monumental effort and resources required for past tycoons to change industries. Today, retail investors can easily diversify or reallocate their investments across different sectors with just a few taps on their brokerage apps, many of which now offer low or zero commission on trades. The apps enhance the agility with which an individual can manage their investment portfolio.
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Build your empire
Buffett said he believes that today’s investors have the potential to build their business empires by investing in stocks. But he also cautioned that flexibility can be a double-edged sword; while it allows investors to make swift moves, it can also lead to hasty decisions.
“It’s a huge advantage which people turn into a disadvantage,” he warned, adding that the practice of making investment decisions based solely on stock price movements is misguided. “There is nothing about the price action of the stock that tells you whether you should keep owning (it).”
So, how should investors use this edge? Specifically, what should guide an investor’s decision to sell one stock and buy another?
Buffett explained that the decision to hold onto a stock should depend on what your expectations are for the company’s future performance, as opposed to how much its stock is worth now.
In other words, the decision to hold or sell a stock should not be dictated by its current instabillity but by a thorough analysis of its prospects. Investors should weigh the expected performance of the company against its current market price, and consider how it stacks up against other ventures.
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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
