Warren Buffett’s made billions in nervous markets. Here’s how!

A lot of investors are understandably nervous about stock market volatility. Some, however, take it in their stride – and can even profit handsomely from it. One who has done so over the course of decades is Warren Buffett.

I think Buffett’s approach is revealing – and potentially helpful for other investors even on far more modest budgets.

Sometimes, markets act in odd ways

A critical thing to understand is that, for Warren Buffett, the stock market can largely be ignored.

What I mean by that is that the day-to-day shift in share prices does not interest a long-term investor such as Buffett the way it may a speculator. Indeed, the Sage of Omaha has said that the stock market could close for a decade and it would not bother him.

That is because his investing approach is built on the idea of identifying businesses with brilliant financial characteristics, buying into them when the share price is attractive and then hanging onto the investment for a long, long time. Indeed, Buffett has described his favourite holding period for a share as ‘forever’.

One reason that approach has been so lucrative for Buffett is that sometimes, markets can behave in what seem like irrational ways. A wider panic can mean brilliant quality share prices come crashing down, even though their longer-term prospects may be largely unchanged.

Such sudden opportunities to buy quality on the cheap mean that Warren Buffett has turned multiple nervous stock markets over the decades to his financial advantage.

Buffett’s focus is on quality, not just price

Case in point: Goldman Sachs (NYSE: GS).

Few financial institutions have its clout, client base or dealmaking expertise. But during the 2008 financial crisis, Goldman wanted to raise a large sum of cash and picked up the phone to a man they knew could help: Warren Buffett.

This was a great deal for Buffett. For putting $5bn into Goldman, he got preferred shares that yielded 10% until the bank paid him to buy them back from him. He also got warrants allowing him to purchase tens of millions of Goldman shares in the next five years at what later turned out to be a bargain price. Buffett has made over $3bn from the $5bn investment.

Small private investors are not getting to get a call from a legendary investment bank offering them that sort of a deal.

I’m getting ready now for future market volatility

But I do think there are some lessons we can all learn from it when it comes to using the opportunities presented in a stock market crash or correction to try and build wealth, on any level.

One of them is not to go bottom fishing at the cost of quality. Buffett’s investment in Goldman reflects his well-known liking for companies with proven business model, strong business franchises, long-term and client demand.

Some shares can fall during market volatility and look cheap at the time – but their price never recovers. That did not happen with Goldman. If I go shopping for bargains during the next period of serious market volatility, I will do so with Buffett’s focus on business quality, not just price.