Profiting from stock market
Founded in by brothers Tom and David Gardner, The Motley Fool helps millions of people attain financial freedom through our website, podcasts, books, newspaper column, radio show, and premium investing services. This article was originally published on September 13, , and was last updated on January 13, Stock market corrections can be scary -- after all, who enjoys seeing the value of their investments fall by thousands of dollars?
Dow 36, - Wikipedia
However, many investors don't realize that times like these are when wealth is really made. Smart long-term investors like Warren Buffett welcome crashes and corrections, so here are three pieces of wisdom from the Oracle of Omaha himself that you can apply to your own strategy and use this correction to set yourself up for the long run.
Don't panic and sell I've recently written that the absolute worst thing you could do in a correction or crash is to panic and sell your stocks. If history is any indicator, stock market corrections and even crashes are a completely normal part of a healthy stock market, and even people who buy at the worst possible times end up winning over the long term.
During a correction, your losses are only on paper. However, if you decide to "cut your losses" and sell, they become real.
As Buffett has said about investing, "Rule No. Never forget rule no. There are certainly some valid reasons to sell a stock at a loss. For example, if something has fundamentally changed about a stock and your original reasons for buying it no longer apply, it can be acceptable to sell. On the other hand, selling a stock that you still believe in for the long run because you're afraid it will go down more is one of the worst investment moves you can make.
It's common knowledge that the main goal of investing is to buy low and sell high, but panic selling during a crash is the exact opposite of this. Buffett knows that in the vast majority of cases, the best way to invest is to buy and hold, no matter what the market is doing.
To illustrate this, consider that Berkshire Hathaway 's NYSE: BRK-B stock price has increased by an average of Many people buy when everyone else is making money and stocks are expensive, then sell when it comes crashing down. Learn from the master -- don't be a buy high and sell low investor! Buy good stocks cheaply Instead of looking at it as an excuse to panic and sell, a market correction should be embraced as a time to stock up on your favorite stocks at a discount.
In Buffett's words, "Whether we're talking about socks or stocks, I like buying quality merchandise when it's marked down.
What he's saying is that investors should look at corrections the same way they look at a sale at their favorite store. Couldn't the market drop even more?
Profiting From the Stock Market’s Latest Fears - Barron's
Of course, it could. Then there will be an even better "sale. And if the price continues to drop, you can continue to accumulate a position, taking advantage of the lower prices with a concept known as dollar-cost averaging. As Buffett says, "Opportunities come infrequently. When it rains gold, put out the bucket, not the thimble. You may not be glad you did it next week, next month, or even next year, but years down the road, you'll be glad you had the discipline to buy quality stocks while they were on sale.
But not all cheap stocks are worth buying Finally, perhaps my all-time favorite Buffett quote is "It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price. If you take a look at Berkshire Hathaway's stock portfolio , you'll notice that most of the companies listed are either the leaders in their respective businesses or close to it.
When market corrections happen, weaker companies in a sector tend to get beaten down more than the leaders -- but for a good reason. Stronger companies have the resources to ride out corrections better, and many actually emerge from the tough times in better shape than they went in. As an example, consider two oil companies -- ExxonMobil and BP. Now, ExxonMobil is a great company. It has exposure to all aspects of the oil business, some of which do better when oil prices are down.
And, Exxon is one of only three companies in the U. On the other hand, BP is a fair company right now, especially when compared to Exxon, with ongoing legal risk and a lower credit rating, just to name a couple of reasons. So, even though BP's stock price has dropped further than Exxon's recently, I would be willing to bet that Buffett would still consider Exxon to be the better bargain. Your correction playbook Whether you agree with every aspect of Buffett's investment strategy or not, one thing is certain -- the man is good at getting through the tough times.
So, when the market gets ugly, it's time to hang on to what you have and be on the lookout for high-quality stocks trading at a discount. If Berkshire's 50 years of outstanding performance are any indicator, it's a winning strategy.
Matthew Frankel owns shares of Berkshire Hathaway. The Motley Fool owns and recommends Berkshire Hathaway, and owns shares of ExxonMobil.
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Matt specializes in writing about the best opportunities in bank stocks, REITs, and personal finance, but loves any investment at the right price. Follow me on Twitter to keep up with all of the best financial coverage! Skip to main content The Motley Fool Fool. Premium Advice Help Fool Answers Contact Us Login. Latest Stock Picks Stocks Premium Services. Stock Advisor Flagship service.
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