Should I react like Warren Buffett to falling share prices?

Our writer looks at how Warren Buffett handles falling share prices and whether it might help his own investment strategy.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Warren Buffett at a Berkshire Hathaway AGM

Image source: The Motley Fool

If shares are owned for long enough, their prices will often move around. It can feel good when they move up, but a lot of share prices often move down too. Investor Warren Buffett has certainly been active in the stock market long enough to see the price of many shares he owns move in both directions.

Here is how he reacts to falling share prices. I think Buffett’s approach can help me improve my own investment strategy when stock markets are unstable.

Focus on value not just price

First it is worth remembering that Buffett never focusses just on a share price. He never invests in shares just because their price is low. After all, even a very cheaply-priced share can still get cheaper.

Instead, Buffett focusses on value. As he explains it, price is what you pay, but value is what you get. So only if he likes a business and thinks it has an attractive investment case does he then consider whether its current share price could make for a good investment.

Quality on sale

A stock market fall can be alarming. But lower share prices are only offers to buy or sell in the market. Unless I act on them, they simply mean a paper loss or gain for my portfolio.

If I do not sell the shares I own, a falling price may not affect me in the long term as long as the prices recover in future. That is never guaranteed, but throughout history many great companies have seen their share prices tumble only to recover later on.

That helps explain why Buffett sees share price falls as a buying opportunity for his portfolio. After all, remember that he is only buying shares in businesses he likes in the first place. So if the investment case remains strong and a falling share price means he can get more value for his money, buying shares seems like a logical thing for Buffett to do.

As he explains: “Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down.”

I can apply that approach to my own investment strategy. It is why I have a watchlist of companies I think are attractive but with a share price that is higher than I am willing to pay, such as Diageo and Spirax-Sarco. If a stock market fall leads to their share prices tumbling, I would be ready to scoop up shares.

Selling as stock markets fall

That does not mean Buffett never sells shares as they fall though. Indeed, as the pandemic spelt increasing gloom for the airline industry, the ‘Sage of Omaha’ unloaded airline shares at a sizeable loss. He had done the same some years before, after an accounting scandal at Tesco had pushed its share price down.

I think that is consistent with the approach I discussed above. In these situations, the underlying investment case that had attracted Buffett to a particular share changed. That can mean the share’s valuation can change too.

Remember, Buffett buys or sells shares based on what he sees as their value. That is not the same as price.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be considered so you should consider taking independent financial advice.

Christopher Ruane has no position in any of the shares mentioned. The Motley Fool UK has recommended Diageo and Tesco. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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