To The Moon

Source: Gerald Miller | CNBC

During a market correction or market crash, the first thing you have to do is stay calm. You have to stay objective and detach yourself temperamentally from the crowd to be a good investor. It does not take brains, it takes temperament.

As Warren Buffett wrote in his 2017 Berkshire Hathaway ($Berkshire Hathaway(BRK.A)$, $Berkshire Hathaway(BRK.B)$) shareholder letter:

“If you can keep your head when all about you are losing theirs, If you can wait and not be tired by waiting, If you can think and not make thoughts your aim, If you can trust yourself when all men doubt you, Yours is the Earth and everything that’s in it.”

Do not panic and avoid selling good businesses

In general, people panic in a correction because they do not know why they bought a stock in the first place. They do not know the business well enough to evaluate its value and therefore focus only on the price and the fact that it is going down.

However, the fact that a stock is going up or down should not influence your decision to buy or sell.

If you were to buy a house for $200,000 and someone offered you $150,000 to buy it off you when the housing market was in a downturn, you would not rush to sell at that price just because the market value has gone down. The same goes for stocks; if you own a piece of a great business, why should you sell it only because someone is offering you less for it?

According to Warren Buffett, some people are just not emotionally and psychologically fit to own stocks. Volatility is your friend according to him, but you can transform it into your enemy if you get scared about the market. Indeed, the stock market is the only place where investors run out of the store during a sale.

In a 2015 interview, Buffett discusses why you should not worry about corrections. He said:

“If you are worried about corrections you shouldn’t own stocks, I mean if you can’t take your stock going down. It is going to go down sometimes if you own a stock so why worry about it. The point is that you buy something that you like at a price you like and then hold it for twenty years. You should not look at it day to day. If you bought a farm or an apartment house you would not get a quote on it every day or every week or every month. So it is a terrible mistake to think at stocks as something that bob up and down and that you should pay attention to all those bobs up and down."

During a correction, you do not have to be that person that is worried about the next week or next month.Focus on the long termand invest only money that you know is going to be in the market for the next ten years. If you can do that, then investing during corrections or crashes becomes a lot easier.

When should you sell a stock?

According to Buffett, there are three possible circumstances when you should sell a business.

One is when something better shows up. Sometimes you may be forced to sell something that you like for something that is even more terrific, especially if you have limited funds to invest. Early in his career, Buffett would often sell stocks just to be able to buy better stocks. Remember the opportunity cost and the fact that If you put money in one company, you cannot put the same money in another company. It is also worth highlighting that if you sell a stock to buy something else, you will probably incur taxes and transaction fees. Therefore, if you factor these extra costs, there is a gap between the sell area and the buy area in which it might be better to do nothing all and just keep your original stock.

The second reason to sell a stock is when the economic characteristics of a business change in a big way. An example of this is when Buffett sold his positions in the airline businesses in 2020, stating that the world had changed for airlines due to the pandemic and he no longer understood the sector.

However, fundamental changes happen quite rarely. In fact, in an annual report to Berkshire Hathaway shareholders in 1997, Buffett states that selling fine businesses on scary news is usually a bad decision.

The third reason to sell is when a single holding gets too big. In general, Buffett prefers having a concentrated portfolio, with Apple (AAPL,Financial) being by far his biggest position, but there are certain situations in which he reduces a position when it gets too big.

When should you buy more of a stock?

Corrections do not happen very often, and big drops from 20% to 50% are even rarer. Therefore, investors should not miss the opportunity to buy great stocks when they are trading at rare discounts.

However, no one should buy a stock only because the price has gone down. Lehman Brothers looked incredibly cheap in 2007 but that would not have been a very good investing decision. Many stocks are cheap for good reason.

Corrections provide a great opportunity to find bargains and buy more of your favorite stocks. However, as Ben Graham taught Warren Buffett, “Price is what you pay, Value is what you get."

Therefore, as always, it's best to stay in your circle of competence and invest only in companies that you understand. Understand the economics of the business and how it will look like in 10 or 20 years from now, otherwise you can't determine the value you are getting.

Make sure to define your circle of competence and stay inside it, because if you get all excited about a stock that your neighbors are talking about and wander out of your circle, you will at the end “get creamed and you should,” as Buffett puts it.

Have a look at your portfolio, and if you have not done so before, verify if your stocks are really inside your circle of competence. If they are, you should then be able to rather easily assess if they are really great businesses, with big moats, strong brands, low Capex and great management.

Once you have identified the companies in your portfolio that are great businesses and that you would be willing to keep for the next 10 years, evaluate if thanks to the correction the stock is undervalued and has a good margin of safety.

Top 10 Holdings

Source: whalewisdom

$Apple(AAPL)$, $Bank of America(BAC)$, $Coca-Cola(KO)$, $Chevron(CVX)$, $American Express(AXP)$

$Occidental(OXY)$, $The Kraft Heinz Company(KHC)$, $Moody's(MCO)$, $U.S. Bancorp(USB)$, $Activision Blizzard(ATVI)$

Source: https://www.gurufocus.com/news/1864749/warren-buffett-on-market-corrections