What Would Buffett Do in a Market Like This?

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.

Buffett

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:

Long-Term Buys
Old Dominion Freight Line (NASDAQ: ODFL)
Tyson Foods (NYSE: TSN)
Goodyear Tire & Rubber Company (NASDAQ: GT
Delta Air Lines (NYSE: DAL)
Morgan Stanley (NYSE: MS)

 

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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About the Author: Profitable Trading

  • Joe Cabot

    You actually believe that the data the fed provides for public consumption is 100% full disclosure? Out of all of the outlandish garbage that you have posted here, that has got to be the golden nugget! Oh, and if it is just a bank, auditing it should be simple mathematics.

  • JohnDille

    WHY WOULD THEY NEED TO AUDIT THE FED??? ALL THE RELEVANT DATA IS A MATTER OF PUBLIC RECORD… ALTHOUGH YOU WOULD HAVE TO BE A FIRST CLASS ACCOUNTANT TO UNDERSTAND THE DATA… AND WOULD ESPECIALLY NEED A SUPER COMPUTER TO ANALYZE ALL THE TRANSACTIONS THE FED MAKES WITH THOUSANDS OF BANKS HERE AND AROUND THE WORLD, DOZENS AND HUNDREDS OF TIMES EACH AND EVERY DAY, EVERY DAY OF THE WEEK!!!

  • Joe Cabot

    Uh, comrade, the Fed has never been audited, so your $4 mil figure has as much substance as your published economic papers that have disappeared into the ether.

  • daniel1154

    Dillie. This is about as whacked out as your political pronouncements and your assertion that the Jews are responsible for communism.

  • daniel1154

    Obama is responsible because he destroyed the private sector economy with excessive regulation, taxation, and government growth. It’s the reason we can’t create full time jobs and wages have decreased every year of his term. Stocks are overvalued due to the Fed and this market has a long way to go to hit bottom.

  • Mark

    John Dille,
    Your logic makes no sense and you need to take a course on economics 101. The Fed controls and manipulates interest rates and has influenced borrowing from consumers to companies purchasing buybacks. Keynesian economics and gov’t manipulation does not cure the ills over any dying economy. Obama is to blame for influencing the fed to print more money so the gov’t could spend more on worthless social and entitlement programs that will eventually destroy the country. Since he has been in office welfare has gone from 37 million to 52 million. Many quality jobs are gone only to be replaced by part-time low paying jobs that high School and college students would work. My nephew, who is in college, could not find a traditional summer job since so many elderly and illegals are working in those sectors now. In my high school & college days you would only see young people working at McDonalds. Now you see many middle ages and older people working. As far as construction and landscaping, I did those jobs for years while attending college and shortly after graduating. Now you only see Mexicans and illegals working because of cheap labor and the Gov’t looking the other way letting them in illegally. Its funny how lobbying and NAFTA which Billy Boy Clinton loved so much would lead to this but it has.
    Yours in democracy & capitalism,
    Mark
    PS: John I would recommend you go get a job and enroll in college. Do something constructive with your life.

  • JohnDille

    THE FED BALANCE SHEET IS ABOUT 4 TRILLION… THE BALANCE SHEET OF ALL THE OTHER FINANCIAL INTITUTIONS IN THE USA ARE WELL OVER 100 TRILLION!!! THE FED IS SMALL POTATOES! THE FED TRIES TO INFLUENCE MONETARY POLICY, BUT MOSTLY, ALL IT CAN DO IS TO PUSH ON A STRING. REAL INTEREST RATES ARE SET BY THE LARGER FINANCIAL COMMUNITY… DOMESTIC AND FOREIGN… AND GLOBAL FINANCIAL ASSETS ARE IN EXCESS OF 250 TRILLION. SO… THE FED HAS ABOUT AS MUCH INFLUENCE ON THE US AND GLOBAL FINANCIAL MARKETS AS THE PRESIDENT HAS ON THE USA… NOT ZERO INFLUENCE… BUT FOR THE MOST PART, VERY SMALL INFLUENCE AND IMPACTS!!!

  • Eileen

    Fed maybe. Not Obama. He is neither responsible nor can he do anything about Fed monetary policy.Bush wasn’t responsible for the crash in 2007 also. You can’t have it both ways. If Obama isn’t responsible, neither was Bush. It’s all Fed – they, and only they, control monetary policy

  • JohnDille

    THE VOICE OF SANITY AND REASON… ON A BOARD NORMALLY DOMINATED BY RIGHT WING DOOM AND GLOOMERS SCREAMING THAT ITS ALL THE FED AND OBAMAS FAULT!