The stock market has gained over 35% since its March lows. However, an uncertain economic outlook and weak consumer confidence could lead to volatile stock prices across many sectors.
One investor who has a great deal of experience in using volatile stock markets to maximize his returns is Berkshire Hathaway (BRK.A, Financial) (BRK.B, Financial) vice chairman Charlie Munger (Trades, Portfolio).
Ignoring your emotions
It can be difficult to control your emotions during volatile periods for the stock market. For instance, at the moment, many investors may feel cautious about the outlook for the S&P 500 due to the economic downturn.
However, some of the best buying opportunities often come along when short-term risks are at their highest and investor sentiment is at its weakest. Therefore, focusing on company fundamentals and buying quality businesses when they trade at low prices could be a means of generating high returns in the long run. As Munger once said:
“A lot of people with high IQs are terrible investors because they've got terrible temperaments. And that is why we say that having a certain kind of temperament is more important than brains. You need to keep raw irrational emotion under control. You need patience and discipline and an ability to take losses and adversity without going crazy. You need an ability to not be driven crazy by extreme success.”
Buy-and-hold strategy
Volatile stock prices can encourage investors to become more active than they would be during normal trading conditions. This may be due to the potential profits and losses that are on offer over a short time period from sharp movements in stock prices.
However, greater activity means higher commission costs, which reduces your returns. Buying and selling stocks frequently may also mean that your holdings do not have the time they need to deliver on their investment potential.
In addition, trying to predict the short-term movements of stock prices is impossible and is more likely to lead to heavy losses and lower returns than a more well-researched buy-and-hold strategy. As Munger once said, “It's amazing how intelligent it is just to spend some time sitting. A lot of people are way too active.”
Adapting in an evolving world
The uncertain economic outlook may not only cause stock market volatility. It could catalyze rapid change across many industries. New consumer trends may emerge and people’s priorities could shift.
This could provide investors with an opportunity to improve their knowledge of fast-growing sectors such as e-commerce and technology to gain a competitive advantage over their peers. Munger believes that continuing to improve your knowledge is a key differentiator between investors when it comes to their long-term return prospects:
“I constantly see people rise in life who are not the smartest, sometimes not even the most diligent, but they are learning machines. They go to bed every night a little wiser than they were when they got up, and boy, does that help, particularly when you have a long run ahead of you.”
Disclosure: The author has no position in any stocks mentioned.
Read more here:
- Howard Marks on Investing After a Market Rally
- Warren Buffett on Buying Stocks When Other Investors Are Selling Them
- Peter Lynch on Investing in an Evolving World​
Not a Premium Member of GuruFocus? Sign up for a free 7-day trial here.
