With share prices jumping around, it can be hard to know where to look for guidance. At times like this, I look to Warren Buffett for advice.
High inflation, rising interest rates, and variable corporate earnings have resulted in a choppy stock market this year. Fortunately, the Berkshire Hathaway CEO has seen it all before.
Three of Warren Buffett’s most famous quotes stand out to me right now. Keeping these at the front of my mind when I’m investing helps me to survive a volatile stock market.
Inflation
Inflation in the UK is currently running at around 10%. That’s very high, but the Oracle of Omaha has some advice on how to cope with rising prices.
In Buffett’s words:
The best protection against inflation is your own earnings power […] the second best protection is a wonderful business.
Coping with inflation comes down to a basic equation. I need to be able to make money faster than the price of goods and services goes up.
According to Buffett, there are two ways to do this. One is to earn more money, the other is to buy a business that can produce cash for me.
That’s why I focus on buying businesses that can generate more and more cash. An example of this is Diploma, which has grown its free cash flow at an average of 16% per year over the last decade.
Time
The second piece of advice is also about making the right investments. According to Buffett:
Time is the friend of the wonderful business, the enemy of the mediocre.
The point of this quote is that it’s important to invest in quality businesses. But it’s also that investors like me should focus on the long term.
In a volatile stock market, it can be easy to get distracted by short-term movements in share prices. But Buffett’s quote serves as a reminder that things generally sort themselves out over time.
A good example is Alphabet. Shares in Google’s parent company have fallen by around 38% over the last year, but the underlying business still looks very strong to me.
Buffett’s advice serves as a reminder to concentrate on the business and its long-term prospects, rather than worry about what the share price might do over the next few weeks or months.
Consensus
The final quote that I think is important right now is about identifying the right businesses. Buffett says the following:
The future is never clear — you pay a very high price in the stock market for a cheery consensus. Uncertainty is actually the friend of the buyer of long-term values.
According to Buffett, the best investment opportunities come when everyone else is looking the other way. When other investors think that a company is in trouble, its shares can be a bargain.
Right now, I think that this is most obviously relevant to Meta Platforms. The company’s recent earnings reports have investors worried, but I think that there’s an opportunity for me there.
With the stock down 71% from where it was a year ago, I think that Meta shares are a bargain. So I’m following Buffett’s advice and continuing to buy them.
