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Last week was tumultuous for stock markets across the globe. While billionaire investor Warren Buffett is no longer in the hot seat at Berkshire Hathaway, his decades of experience investing in turbulent markets means that he immediately comes to mind at times like these.
So I am applying some lessons from the Buffett playbook as I navigate this period of market uncertainty and try to turn it to my advantage!
Being greedy when others are fearful
As a starting point, there is Buffett’s famous quote: “Be fearful when others are greedy, and greedy when others are fearful”.
We have seen a lot of greed during the AI boom. Now we are seeing a significant amount of fear in the markets.
That could mean that now is a good time for an investor to be “greedy” for opportunities to invest in brilliant businesses at attractive prices.
Distinguishing price from value
However, a falling share price does not necessarily make for a bargain. A share can fall 10%, 50% or even 90% and still be overpriced.
As Buffett puts it, “price is what you pay, value is what you get”. A share is not necessarily a bargain just because its price has fallen dramatically.
It also matters what you are getting — how strong the business is and how attractive its financial prospects look.
It’s not just about buying – selling matters too
Using stock market turbulence to try and snap up bargains is only one side of the equation though.
Sometimes, when the stock market swings dramatically, investors dump shares they own at a loss because they feel scared looking at a price chart that has been going downwards rapidly.
That is understandable in terms of human psychology. But it can be financially disastrous.
Buffett is a long-term investor and has hung onto some of his investments through multiple market cycles.
Sometimes, a weaker economy can change the investment case for a share. But otherwise, just because the price is suddenly lower, that is no reason to believe that the long-term value has necessarily changed.
Indeed, if a business I believe in suddenly plummets in price, I consider whether it might be a buying opportunity for my portfolio.
Readiness helps
Buffett has been able to move fast in stock market crashes because he did his homework years or even decades in advance.
Similarly, I keep a list of shares I would like to own if I could buy them at the right price. For example, Rolls-Royce (LSE: RR) has had an incredible few years. It is up 765% over the past five years.
The company benefits from operating in industries that have high technological and financial barriers to entry. Its installed base of engines helps it earn ongoing maintenance work. It is also benefiting from strong demand in defence and power systems as well as civil aviation.
However, the share price already reflects that – and I feel it does not properly reflect risks like a sudden slowdown in civil aviation, as happens from time to time.
So for now, Rolls is on my watchlist but I have no immediate plans to buy at today’s price. Meanwhile, I think the current market offers plenty of other bargains already!
Should you invest £5,000 in Rolls-Royce Plc right now?
When investing expert Mark Rogers and his team have a stock tip, it can pay to listen. After all, the flagship Twelfth Magpie Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets.
And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Rolls-Royce Plc made the list?
Christopher Ruane does not hold any positions in the companies mentioned.
This story originally appeared on Motley Fool
