The recent stock market volatility might have discouraged some investors from investing in stocks and shares. And that’s an understandable reaction. It takes a sound emotional constitution to watch the value of your portfolio plunge without feeling unsettled.
But even the great investor Warren Buffett experiences setbacks from time to time. For example, in 1974, the per-share market value of his investment vehicle Berkshire Hathaway declined by almost 49%. And in 2008, it dropped by nearly 32%.
Why Buffett ignores setbacks in his portfolio
Buffett is on record advising us that we should expect to see the value of a portfolio decline by as much as 50% in any one year “without becoming panic-stricken.” So, I’m only going to run around the house like a headless chicken if my share account dips by as much as 51% or more!
On a serious note, I think the best way to handle stock price reversals is by doing what Buffett does. He holds through them. And he can do so with confidence because he knows he’s selected stocks backed by what he calls “wonderful” businesses. And he’s bought those stocks when the valuation of the underlying businesses were attractive.
Indeed, Buffett’s long-term investment perspective requires ignoring the shorter-term volatility in his portfolio. It’s often the case that quality businesses come roaring back from short-term challenges. And stocks tend to bounce back to reflect the improving outlook. But Buffett’s eye is on even larger gains over multiple years driven by the expansion and progress of businesses.
When looking back after a long, multi-year holding period, setbacks along the way can appear as minor blips. However, such reversals do tend to offer the opportunity for Buffett to find stocks when they are assigning a cheaper valuation to underlying businesses. And because finding a valuation that makes sense is part of his strategy, he’s often out buying stocks when everyone is worried about something.
A golden opportunity
And we’ve all had plenty of opportunities to worried about something over the past couple of years. The pandemic, war in Ukraine, supply chain issues, inflation, to name some of them. And the reaction of the stock market and individual company shares has at times thrown up some attractive valuations.
So, I’m listening to Warren Buffett and buying cheap UK shares to aim for a million. And just like Buffett, I’m also considering the quality of each enterprise and its growth prospects in the years ahead as well as its current valuation.
However, all shares carry risks as well as positive potential. And that’s true even if I aim to copy Buffett’s strategy. Nevertheless, I think the current period of extended uncertainty looks like a golden opportunity for long-term investors like me. And I’m working hard with my stock research and watch list.
