10 Lessons of Sanity From Warren Buffett During Insane Markets

8. Patience and Discipline Must Be Maintained at All Times

Buffett rarely goes “all-in” when it comes to investing in stocks.  While an outright acquisition is all-in, your investing habits likely don’t evaluate acquisition targets. The simple rule is that you don’t have to buy your shares all at once. In too many instances to count, Buffett and his team started a position in a new stock that did not look massive at first, but then the position grew and grew over time. Sometimes the Berkshire Hathaway team adds to a position for years. This was seen in Apple, and the best example was Wells Fargo & Co. (NYSE: WFC). Buffett accumulated shares for many years. There are instances when Buffett may make cuts and then reverse back to additions. It’s rare, but it has happened.

Some investors also refer to gradually accumulating shares 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 after accumulating a position over the course of time: you don’t have to sell your winning or losing shares all at once either.

9. Value Traps: Lower Prices Alone Don’t Make Companies Cheap

Sometimes certain stocks have 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 consider that. 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.

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10. Picking Good Dividends and Buybacks as Backstops

When financial markets become uncertain, some investors decide to hunker down in companies that have safe dividends and also are buying back stock over time. Buffett himself rarely buys back Berkshire Hathaway shares, and Buffett has outright refused to pay his Berkshire shareholders a dividend. Still, if you look at his massive investment portfolio it is certainly clear that 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 also is 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 a half of investors’ total returns over time. In periods of uncertainty, sometimes companies with multibillion stock buyback plans might be the biggest buyer of stock during weak markets.