Having kicked off his investment journey at the age of 11, Warren Buffett’s no stranger to stock market volatility. But for newer investors, the last few weeks haven’t been particularly pleasant, especially for those allocating capital across the pond.
The US offers a lot of exciting growth opportunities for British investors, especially within the technology sector. However, compared to UK shares, US stocks can be significantly more volatile. That’s been made perfectly apparent, with some of the most popular stocks to own, like Tesla, Nvidia, and Alphabet, falling by double digits lately.
But as unpleasant as it can be to watch a growth portfolio suffer, volatility creates interesting opportunities for prudent individuals with an appetite for risk. Billionaire Buffett is certainly part of this group with a habit of going on a shopping spree whenever everyone else starts panic selling.
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Given his impressive performance track record, heeding his advice could be a critical first step to profiting from the recent chaos. So what does the ‘Oracle of Omaha’ advise investors to do in situations like today?
1. ‘If a business does well, the stock eventually follows’
In the short term, a stock price is driven by the mood and momentum of investors. However, in the long run, their value is derived from the value of the underlying business. That’s why Buffett’s always exclusively focused on the performance of companies rather than that of stocks.
For newer investors, that’s easier said than done. After all, suffering a double-digit decline is hardly fun. And buying more shares when prices are in free-fall can sound idiotic.
Yet this is precisely how Buffett has achieved market-beating returns over the last 60 years. And it’s the same tactic I deployed back in 2022 when Shopify (NYSE:SHOP) saw over 80% of its market capitalisation wiped out.
The e-commerce enterprise undoubtedly encountered some headwinds from rising inflation and interest rates. However, its long-term strategy remained unscathed, with the underlying business continuing to chug along nicely despite what the crashing share price suggested. As such, I started snapping up more shares in April 2022 and have been subsequently rewarded with impressive double- and even triple-digit returns since.
2. ‘Risk comes from not knowing what you’re doing’
Blindly buying more shares in portfolio positions with falling stock prices isn’t a winning strategy. It’s essential to discover what’s driving the valuation in the wrong direction. Is it just short-term investor pessimism and panic? Or is there a fundamental problem with the business that’s recently come to light?
If it’s the latter, then selling, even at a loss, might be far less risky than holding on or buying more. Even Buffett’s learned this lesson the hard way with a company called Dexter Shoes. A failure of competitive analysis resulted in a $433m investment eventually tumbling to zero.
Looking again at Shopify, although I remain bullish, I’m not blind to the risks surrounding this enterprise. The group’s ability to keep costs under control as it scales its operations remains a concern among investors. As is the increasingly intense competitive landscape of both industry titans and international start-ups.
In other words, by staying informed about what could go wrong as well as what could go right, investors can avoid costly mistakes on their journey to building wealth.
