It has been a choppy few weeks in the US stock market, especially for some well-known tech names like Tesla and Nvidia.
Will that nervousness spread elsewhere? It may do, although trying to predict what happens next in markets can never be done with certainty.
Whether or not global markets experience turbulence, I am listening to some advice from billionaire investor Warren Buffett.
A good night’s sleep is priceless
When markets are booming and it can seem easy to make money, lots of people can do well. As Warren Buffett says, it is when the tide goes out that you can see who has been swimming naked.
Rocky markets can trouble a lot of people, as they get nervous about their portfolios and how much money they might be losing.
Not, it seems, Warren Buffett. He said, “when forced to choose, I will not trade even a night’s sleep for the chance of extra profits.”
By taking a careful approach to balancing potential rewards with risks, Buffett does not lose sleep worrying about what might be going on in the markets.
See the market as a servant, not a master
How can he stay that calm? After all, over his long career to date, Buffett has experienced some pretty steep losses.
One thing that I think helps is the way he thinks about the stock market. He borrows his teacher Ben Graham’s idea of a person called (in less gender-inclusive days) ‘Mr Market’. Essentially, Mr or Ms Market offers to sell you shares (or buy them from you) at a certain price each day. You can buy, sell or do nothing.
What is so powerful about that as a way of thinking for an investor?
It strikes me as a great reminder about what is going on when the market is tough.
Just because a share price crashes does not force us to sell it. One option is simply to do nothing.
By treating the stock market as his servant, Warren Buffett seems not to worry too much about its twists and turns. He can treat a crash as a buying opportunity, while ignoring a steep price fall if he does not think the underlying investment case for a share he owns has changed.
Invest for the long term
After all, Warren Buffett is a long-term investor.
Consider his stake in financial services company American Express (NYSE: AXP).
He bought into the business when its share price plummeted in 1964 following a scandal involving a third party falsifying levels of commodities that meant American Express did not have the quantity of a commodity (salad oil) it believed it did.
That may sound arcane, but Amex shares plunged – and Warren Buffett pounced as he sensed the opportunity in what he saw as market overreaction. As he says, “be greedy when others are fearful” (although understanding why they are fearful matters).
Over the course of the decades since, his belief in the company’s strong brand, unique business and proven business model has certainly been proved right.
American Express faces risks – a turbulent market could lead to higher consumer credit defaults, eating into profits.
But with his eye firmly on the long term, Warren Buffett focuses on the underlying quality of a business over the economic cycle, not short-term market noise.
