Investing through market volatility. How to keep your head when all about you are losing theirs

A beach at sunset where there is an inscription on the sand "Breathe Deeeply".

As a retail investor of less than three years, I count myself as something of a novice. I mean, with a bewildering number of strategies out there on how to beat the market, which are the best ones to choose?

One of the biggest legacies to emerge from the Covid crash and the subsequent lightning recovery of markets, particularly in the US, was the rise of the retail day-trader and speculator. I mean, stocks only ever go up, don’t they!

But those heady days of wild speculation are long gone and many retail investors who got sucked into the bubble late, blasé to the risks, have been left with scars that won’t easily heal.

Now we are entering a period of greater volatility, many retail investors are turning their backs on stock markets. But to me, that’s a big mistake. For savvy, long-term investors, navigating market volatility can be a source of great rewards both financially and intellectually.

The intelligent investor

Benjamin Graham, Warren Buffett’s mentor, summed up how to invest through market volatility:

[P]rice fluctuations have only one significant meaning for the true investor. They provide him with an opportunity to buy wisely when prices fall sharply and to sell wisely when they advance a great deal. At other times he will do better if he forgets about the stock market and pays attention to his dividend returns and to the operating results of his companies.

An investor should never buy a stock because it has gone up or sell one because it has gone down.

What an investor should be doing is using their own judgment and inclination to determine the price that represents an attractive entry point to become part owner of a company.

All well and good, you might say. But how on earth does one go about doing that?

Personal insights

Some investors will adopt a ‘scientifc’ method to stock picking. They will examine the books in detail, and consider a range of financial metrics and analysts’ price forecasts.

Personally, I use this approach judiciously. I will always hone in on the balance sheet to understand a company’s debt position. But beyond that, I pay less attention to ratios like price-to-earnings (P/E).

The problem with analysts’ forecasts is that their assumptions rest on a fairly short period in the future. With so many minds mulling over the short-to-medium term price movements of stocks, it tends to be self-defeating over the years.

The intelligent investor, to my mind, spends more of their time reading, thinking, and gleaning information from a whole variety of sources, however unusual. For example, it recently come to light that one of the reasons Warren Buffett bought shares in Apple was after seeing how upset a friend was upon losing their iPhone!

I have come to see investing as a journey of self-discovery. That’s why it is so hard to ‘copy’ someone else’s investment approach. Yes, I can buy the same stocks as they do. But what I can’t replicate is their conviction. Only an individual who has done their homework will be likely to stick with a stock and view short-term price movements as nothing else other than background noise.

All the best on your journey of self-discovery!

The post Investing through market volatility. How to keep your head when all about you are losing theirs appeared first on The Motley Fool UK.

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Andrew Mackie has no position in any of the shares mentioned. The Motley Fool UK has recommended Apple. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.