10 Lessons of Sanity From Warren Buffett During Insane Markets

7. Picking Your Price for Value

A classic sense of investing in Buffett is one in which there just might be no one single instance. Buffett has employed the theory of value investing for years, but that might not just be a low price-to-earnings (P/E) ratio. Buffett is willing to be opportunistic, and sometimes Joe Public can think like Buffett if it seems that the stock market carnage is becoming too great.

In this instance, the strategy would be to put together a list of the companies you think are the best run that will do well in the long-term business cycle changes and pick your price. If a stock was too expensive or had run too much without pullbacks at $50, think about what price you are willing to pay and set limit orders. If the market loses its sanity and the company’s stock drops to $35, you might be willing to own it there, even if you have no idea whether you caught the bottom.

8. Patience, or Discipline

You don’t have to buy your shares all at once. There are too many instances to count when Buffett and his team start a position in a new stock that does not look massive at first, but then you see the team grow the position, and sometimes they keep adding to that position. This was seen in Apple, and the best example was Wells Fargo & Co. (NYSE: WFC). Buffett accumulated shares for many years, up until its most recent woes.

Some investors also refer to this as “legging in” on a position, and when stocks are falling the traditional buying at various prices is thought of as “dollar cost averaging.” Now think about this: you don’t have to sell your winning or losing shares all at once either.

9. Lower Prices Alone Do Not Make Companies Cheap

Sometimes there are certain stocks with a price that keeps falling. It may have been a great business before, but it’s important to know that you should not try to catch a falling knife. Buffett has come to the rescue of many companies before (General Electric, Goldman Sachs, Bank of America and so on), but those are generally in times of need when Buffett thinks he can get a steal (he got better terms than the government in TARP).

Then there are instances when management has hurt a company, or when the management team has lost the trust of the public and shareholders. Buffett does not go after companies with accounting irregularities, and most investors should take that into consideration. If a stock fell to $40 from $50, it’s probably “cheap” for a reason, and that alone does not entice Buffett when there are internal problems in a company.

10. Picking Good Dividends and Buybacks as Backstops

When the financial markets become uncertain, some investors decide to hunker down in companies that have safe dividends and are also buying back stock over time. Buffett himself rarely buys back Berkshire Hathaway shares, and he doesn’t pay his Berkshire shareholders a dividend, but go look at his investment portfolio. It’s full of companies that have safe dividends that grow over time.

Dividends being safe means that there is little or no risk to a company’s ability to pay those same (or better) dividends in the years ahead, even if a recession comes. Buffett’s portfolio of stocks is also full of companies that have used capital to buy back their own stock to lower the float of shares.

Depending on the business cycle and the sectors selected, dividends alone can account for one-third to half of investors’ total returns over time. And in periods of uncertainty, sometimes companies with multibillion stock buyback plans might be the biggest buyer of stock during weak markets.

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