One of the most-cited barriers for potential share market investors buying stocks is the inherent volatility that comes along with it. Share market volatility is an unavoidable part of investing, whether you're an everyday investor or Warren Buffett.
I get it. The prospect of having your life savings locked up in shares that have periodically dived by 20, 30, or even 50%, as has happened in previous stock market crashes, is a terrifying one. However, it should not stop you from accessing the life-changing powers of the stock market that would otherwise allow you to build wealth.
So today, let's discuss how the legendary investor Warren Buffett approaches stock market volatility and uses it to his, and his company Berkshire Hathaway Inc's (NYSE: BRK.A)(NYSE: BRK.B) advantage.
Hopefully, you'll see how stock market volatility can be used to turbocharge your wealth.
How can Warren Buffett's advice help us welcome volatility?
Markets go up and down all the time. Mostly, these short-term moves are inspired by either fear or greed. Investors love making money. But they hate losing it more. It's this dynamic that pretty much explains why the markets are volatile. Whenever there is a big panic, we see huge sums of capital pulled out of the markets as investors try to stem their losses.
This can have a powerful emotional effect on everyday investors. Our gut instinct is usually to follow the herd. And the logic behind 'I'll just sell now so I don't lose even more money, and buy back in later' is easy to understand.
However, the Buffett mindset offers a very different perspective. Warren Buffett often tells us that we should think of investing in shares the same way as investing in a house, pointing out that you are investing in a real business, not a ticker code. Here's a quote that sums this up perfectly:
Buy a stock the way you would buy a house. Understand and like it such that you'd be content to own it in the absence of any market.
Here are a few more Warren Buffett quotes that expand on this mindset:
I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years.
Calling someone who trades actively in the market an investor is like calling someone who repeatedly engages in one-night stands a romantic.
The stock market is designed to transfer money from the active to the patient.
The most important quality for an investor is temperament, not intellect. You need a temperament that neither derives great pleasure from being with the crowd or against the crowd.
I've made money over the years by buying into good companies, run by good people, at attractive prices. And I don't try and make it out of buying into the market at one point and selling at another point.
I hope that paints a somewhat clear picture.
Buffett: Buy when others are selling
So now we know how Warren Buffett views the function of the markets when it comes to investing for the long term. But how does he capitalise on volatility?
Well, Buffett is famous for "being greedy when others are fearful". He is almost always a huge buyer of shares during market crashes and other financial panics. Indeed, most of his big buys have occurred during times of immense volatility. Put another way, he is often the person on the other end of the transaction when most investors are panicking and selling out of their shares.
Remember how Buffett said that he buys "good companies, run by good people, at attractive prices"? He views times of market volatility as simply a massive Black Friday sale, where he can pick up shares of his favourite companies at discounted prices.
Here is another couple of Warren Buffett quotes that prove this:
To refer to a personal taste of mine, I'm going to buy hamburgers the rest of my life. When hamburgers go down in price, we sing the 'Hallelujah Chorus' in the Buffett household. When hamburgers go up in price, we weep. For most people, it's the same with everything in life they will be buying — except stocks. When stocks go down and you can get more for your money, people don't like them anymore.
The true investor welcomes volatility. A wildly fluctuating market means that irrationally low prices will periodically be attached to solid businesses. It is impossible to see how the availability of such prices can be thought of as increasing the hazards for an investor who is totally free to either ignore the market or exploit its folly.
So I hope Warren Buffett's wisdom can help you understand stock market volatility. Most of us don't like to see the value of our shares fall (myself included), no matter what Buffett says. But if you always keep his wisdom in mind when the markets are in a panic, you will be far wealthier in the long run, that I can promise you.
That's why I've personally done most of my 2023 stock market buying over the past month. Why? Because the S&P/ASX 200 Index (ASX: XJO) lost more than 4% of its value over the last two weeks of October. I didn't enjoy this, but I thought it was a good time to top up on some of my favourite investments. And now that the ASX 200 has bounced almost 5% higher since its October lows, I'm feeling very comfortable with my choices.
As Warren Buffett has said, the markets are there to serve, not to guide.