BusinessDay

A classic strategy for investors in market downturn

One of the most important quotes of Warren Buffett on investing is: “If you aren’t willing to own a stock for 10 years, don’t even think about owning it for 10 minutes.”

Buffett never chose stocks just because he thought their prices were going to rise that week, that month, or even that year.

His two rules of investing are: “Rule (1) Never lose money, and Rule (2) Never forget rule number one.”

No investor likes watching the value of his or her stock portfolio decline day after day. But since last month, that’s exactly what has taken place.

Investors have long praised Buffett’s ability to pick the stocks to invest in. He is also lauded for consistently following value investing principles.

While it is only natural to be concerned about a market downturn, selling off stocks when their prices are low or near rock bottom is rarely the right move.

Also, when a market is declining, it is not necessarily a good time to go on a buying binge, hoping that prices will trend back upwards in the near future.

When the market is down, particularly for long stretches of time, it is considered to be a bear market.

In a bear market, the dos and don’ts include not pulling your money out, continuing to invest based on your needs, and clearly understanding the risks of the current environment. As an investor, you must also not overlook some room to take advantage of sound opportunities.

Like Buffett, your stock investing strategy should be value investing. Value investing involves selecting a stock whose share price is trading below its intrinsic value or book value.

Investments usually are guided by specific goals and decisions that are based on the investor’s risk tolerance as well as his/her short-mid-and long-term plans.

Yes, when the market becomes volatile, it can be tempting to throw that careful planning aside and simply pull your money out of the market.

While volatile markets are created by short-term uncertainties that are likely to evolve over time, selling into those markets implies you are executing on information that is askew with your long-term investment goals.
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Whether the market moves up or down, it is truly hard to separate investors’ emotions from their decisions; by the way, we are human beings.

When an investor makes an emotion-driven decision, he is likely not making a decision based on his plan, but in reaction to a triggering event such as fear-inducing headlines as we see these days.

Investment experts believe that the only time emotions should play a role in investment decisions should be when an investor is initially establishing his investment strategy and assessing his risk tolerance.

Market watchers also believe that it is not a good idea to embark on a spending binge in a down market, simply because purchase prices of stocks may be cheaper. Simply, it is best to focus on your long-term plans and priorities.

Though a down market can provide opportunities, it still needs to be evaluated within the framework of an investor’s goals and risk tolerance.

No doubt, a bearish market offers opportunities as long as those opportunities are wholly examined and are consistent with an investor’s personal investment agenda.

Buffett, who has a net worth of $124.3billion as at April 18, 2022, according to Forbes, resisted the temptations associated with investing in the “next big thing”.

With his strange ability to uncover long-term profitable investments, it is reasonable most investors would like to know exactly what Buffett looks for in a stock.

His strategy for picking winning stocks starts with evaluating a company based on his value investing philosophy.

Buffett also looks for companies that provide a good return on equity over many years, particularly when compared to rival companies in the same industry.

When looking for a great company to invest in, Buffett also reviews a company’s profit margins to ensure they are healthy and growing.

He focuses on companies that provide a unique product or service that gives them a competitive advantage, while also focusing on companies that are undervalued that he can purchase at a good discount.

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