8/1/2007 – The Silver Lining to Market Volatility

Recent market volatility is a great reminder of why an investor needs a long time horizon. The stock market is risky, uncertain and deceptive in the short term. Prices often jump or fall abruptly, rather than glide up and down smoothly. However, over the long-term stocks consistently provide the highest returns compared to other asset classes. 

As a helpful suggestion rather than focus on the daily price movements, investors should focus on the fundamentals of the company – sales and earnings growth. If the company is growing and the valuation is attractive, the stock price will eventually reflect these fundamentals. 

In fact, it is time such as these that separate good investors from bad investors. Warren Buffett has spoken often about the need for successful investors to have the right temperament: “It requires qualities of temperament way more than it requires qualities of intellect.” (March 9, 2006 Outstanding Investor Digest, from 2005 Berkshire Hathaway investor meeting). 

Like most stock market corrections, the current shake-out if affecting almost all stocks. Many stocks deserve lower valuations but not all. Viewed this way the correction is a blessing for long-term investors because many great companies will be available to purchase at bargain prices.