Following Warren Buffett’s advice in volatile market conditions

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The Oracle of Omaha’s tips could help you to overcome the S&P 500’s unpredictability

The S&P 500’s recent performance has been exceptionally volatile. The index has recorded some of its largest daily and weekly gains, as well as some of its biggest declines.

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Q1 2020 hedge fund letters, conferences and more

Amid highly changeable market conditions, following Warren Buffett’s advice could help you to improve your return prospects.

Specifically, his long-term approach and focus on self-discipline at a time where emotions are running high could be beneficial to investors who are seeking to navigate unpredictable market conditions.

Long-term focus

A highly volatile stock market may lead some investors to determine that there is an opportunity to make a quick buck. If the index moves by 5% or even as much as 10% in one day, they may reason, it is possible to generate high returns in a very short space of time.

Warren Buffett takes a very different standpoint when it comes to the time horizon of his investments:

“If you aren't willing to own a stock for ten years, don't even think about owning it for ten minutes”.

In reality, there are a wide range of variables that can affect the performance of the stock market in the short run. At the moment, for instance, news flow regarding Covid-19 is likely to have a significant impact on investor sentiment at a time when the near-term prospects for the economy are highly uncertain.

Since this, and other variables, are impossible to accurately predict on a consistent basis, investors may be better off focusing on the long-term prospects for their holdings. This could produce a more attractive risk/reward ratio compared to short-term trading.

Careful consideration of buying opportunities

The S&P 500’s recent recovery still leaves the index trading well below its 2020 highs. As a result, there are numerous stocks that appear to trade at discounts to their intrinsic values. Value investors, therefore, have a great deal of choice when it comes to buying stocks for their portfolio.

A great deal of choice can lead investors to buy a large number of cheap stocks without considering their quality, recovery potential, and financial standing. According to Buffett:

“An investor should act as though he had a lifetime decision card with just twenty punches on it”.

By carefully analyzing every opportunity that may be available in a volatile market, and only acting on a small number of them, you can improve your chances of unearthing the most attractive stocks that are currently available.

Overcoming emotions

Stock market volatility can cause investors to experience a range of emotions. On days when stock prices are rising, investors may become over-confident about the prospects for the index. They may, for example, deploy a large proportion of their available capital.

By contrast, on days or weeks where the stock market is falling, investors may become fearful. This may lead them to avoid buying stocks while they are more attractively priced. Worse still, they may end up selling their holdings at discounted prices as panic takes hold.

Warren Buffett has long realised the importance of maintaining an even temperament when it comes to investing:

“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”.

Investors who are able to neither become excited nor feel despair during volatile market conditions may be able to better capitalize on the opportunities that are available. They may be less likely to act on impulse, and more likely to focus on the market’s fundamentals, which can lead to superior returns over the long run.

Article by Robert Stephens, CFA