Stock market chaos! 3 pieces of investing wisdom from Warren Buffett

Warren Buffett is often quoted when the stock market tanks, as it has in recent days. That’s because after eight decades of investing, he’s been there, done that, and got the proverbial T-shirt(s).

Moreover, Buffett arguably understands the psychology behind greed (raging bull markets) and fear (bear markets) better than any other investor.

Worried about the market mayhem right now? Here are three classic Buffettisms to calm the nerves.

Gospel

The ‘Oracle of Omaha’ famously said: “Be fearful when others are greedy, and greedy when others are fearful.”

This quote is practically gospel in the investing world. When fear is driving prices lower, Buffett says it’s time to start looking around for opportunities. The reason is that panic often offers up bargains for long-term investors. 

Over the last few days, there has been a lot of talk about the stock market crash of 1987, with some commentators drawing parallels between then and now. It’s interesting to note that Buffett started buying shares of Coca-Cola (NYSE: KO) in the aftermath of the epic October 1987 crash. That was a time when many investors were still too shellshocked to even consider buying a single share. 

The Coke position he built between 1988 and 1994 cost approximately $1.3bn. Today, it’s worth about $25bn!

That’s not including the annual dividend, which Coca-Cola has raised for 63 consecutive years. Last year alone, Buffett’s Berkshire Hathaway bagged $776m in dividends from the stake.

Through thick and thin

Another Buffett classic is:  “If you aren’t willing to own a stock for 10 years, don’t even think about owning it for 10 minutes.”

I see this quote as a test for each stock in my portfolio. If I’m not happy holding it through thick and thin, through booms and crashes, it probably doesn’t belong in my portfolio in the first place.

Of course, this doesn’t mean I will blindly hold on to every stock for a decade. Some will disappoint while others will run into unforeseen difficulties or become grossly overvalued. After all, Buffett has dumped many stocks over the years for various reasons.

But I should be at least willing to own the stock long term when I buy it. Thinking about things this way makes it easier to hang on to my shares when everyone else is selling and the market is plunging. 

Resilience

The third Buffettism is: “Only when the tide goes out do you discover who’s been swimming naked.”

In other words, market crashes expose weak balance sheets and fragile business models. So investing in strong businesses is important.

However, while Coca-Cola’s fundamentals are rock-solid, that doesn’t mean I want to invest in the beverage giant like Buffett. Consumers could come under a lot of pressure if inflation spikes much higher during a global trade war. That might put pressure on sales of branded drinks like Coca-Cola. 

Meanwhile, Buffett hasn’t added to his position since the 1990s, during which time the stock has actually underperformed the S&P 500. But the compounding dividends almost certainly make it a keeper for Berkshire. 

The takeaway here is that having resilient companies with strong balance sheets in my portfolio makes it easier to ride out market downturns. In many cases, they’re likely to not only survive the storm, but emerge stronger on the other side. 

This post was originally published on Motley Fool