What Would Buffett Do in a Market Like This?
Mon Aug 24 2015
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What Would Buffett Do in a Market Like This?


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China is devaluing its currency. Oil is crashing. Greece is facing years of slow growth and might be dragging down the rest of Europe, where GDP growth is already slowing. The Federal Reserve is also concerned about global growth, which may delay an interest rate hike.

The news hasn’t been this bad at the end of the summer since… 2014.

Last year, investors were worried about conflicts in Ukraine and Gaza. The death toll from the Ebola outbreak in Africa topped 1,000. Greece was still in crisis, and Congress was up in arms about corporate tax inversions.

We see the same doom-and-gloom trend if we looked back at the summer of 2013 with the Detroit bankruptcy, Edward Snowden leaks, civil war in Syria and violent revolution in Egypt.

My point is there are always going to be problems somewhere in the world.

At times like these, I like to ask myself, “What would Warren Buffett do?”

While I don’t have a direct line to his office, Buffett is famous for revealing his personal market insights and broad clues about his process in his writings.

For example, how did Buffett respond to a deluge of scary headlines and pessimism about the global economy?

“The financial world is a mess, both in the United States and abroad. Its problems, moreover, have been leaking into the general economy, and the leaks are now turning into a gusher. In the near term, unemployment will rise, business activity will falter and headlines will continue to be scary.

“So… I’ve been buying American stocks.”

That’s from an op-ed Buffett wrote for The New York Times back in October 2008. Granted, our current market environment is in much better shape than it was when that piece was published. At the time, the U.S. economy had been in a recession for 10 months and the Dow Jones Industrial Average had fallen more than 35% from its all-time highs.

Regardless, Buffett’s response still applies. He wasn’t buying stocks because he thought the market had bottomed — in fact, he clearly states in his op-ed that this was not his intent (and it’s a good thing, because he missed the mark by a number of months, as we can see on the chart).
No, Buffett was buying stocks because they do well in the long term, even in the face of daunting headlines.

“But fears regarding the long-term prosperity of the nation’s many sound companies make no sense. These businesses will indeed suffer earnings hiccups, as they always have. But most major companies will be setting new profit records 5, 10 and 20 years from now.”

Now here is where Buffett’s main advantages over average investors become startlingly clear — his vast resources give him the luxury of buying and holding for years or even decades.

Like Buffett, I also believe in buying sound companies despite the onslaught of negative headlines. In recent weeks, I’ve recommended several stocks I think will be resilient, even in a volatile market:

 

But I don’t want to just buy and hold these stocks in hopes of making a return in the coming years. Instead I plan to compensate for the handicap of being a smaller investor by adding hundreds or even thousands of dollars to my returns.

Since I don’t have Buffett’s resources, I cannot withstand a large drawdown in the event of a correction or bear market. Therefore, I must have additional protection in place to offset losses. Also, I don’t want to wait five to 20 years to see a substantial return on my investment.

Fortunately, there is a strategy that alleviates both of these concerns. It involves options, but it is not complicated or high risk. In fact, it’s one of the most conservative income strategies available to traders. Not only can the income it generates offset declines in the stocks you hold, but it has delivered annualized gains of 135%, 209% and 247%.

 


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