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I’d listen to Warren Buffett to stay calm in today’s stock market rally

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close-up photo of investor Warren Buffett
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Warren Buffett is arguably the greatest investor of all time and one reason for his success is that he always takes a long-term view. He never looks at what the stock market might do today, or tomorrow, but years into the future. That allows him to tune out the short-term noise that distracts too many investors, and focus on companies with a great future ahead of them.

Warren Buffett isn’t phased by periods of underperformance, and he doesn’t get carried away when he beats the stock market either. As ever, what matters is the general direction of travel, rather than temporary ups and downs.

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Warren Buffett’s approach is particularly useful in today’s rising stock market. The rally of the last year has driven the FTSE 100 above 7,000, and investors are likely to be divided in their response. Some will be overconfident, and expect shares to fly even higher. Others will be nervous, and fretting over the potential for another stock market crash.

I buy stocks for the long term

Both are making a mistake that Warren Buffett wouldn’t. He ignores short-term market movements and invests in stocks for decades, rather than years. He once cheekily said that his favourite holding period is forever. By taking such a far-sighted view, he zones in on what really matters. That is, where companies are heading in the longer run, rather than how they stand today.

Many investors will be sitting on healthy gains right now. FTSE 100 mining giant Rio Tinto is up 41% in the last year. Insurer Aviva is up 57%. Online fashion retailer ASOS has jumped 66% and asset manager M&G by 70%. Investors in US tech giants will have done even better.

While it may be tempting to bank my profits, I would rather emulate Warren Buffett, and examine where their strategies will take them next. My winners may look more expensive today, but could still offer good value based on future growth prospects. Other stocks may look cheaper, but have weaker long-term prospects.

I’m listening to Warren Buffett

I also like to remind myself why I bought that company in the first place. Does the original investment case still stand? And do I want to rack up trading costs by regularly reshuffling my portfolio?

Selling stocks because they have done well and look pricey is just as daft as selling them because they have done badly and look cheap. What matters is the next 10 or 20 years, rather than the last 12 months. Warren Buffett is always looking to the future, even at the grand age of 90, and I try to do the same.

Globally, stock markets have soared since November’s Covid vaccine breakthroughs. They have been been given a further lift by massive stimulus, especially from the US. At some point, these drivers will weaken. Warren Buffett wouldn’t worry too much about that, and neither do I. I’m willing to stick with high-quality companies, even if they have done well lately.

These stocks have staying power.

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Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has recommended ASOS. 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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