Market Volatility: How Warren Buffet Manages It

Market Volatility: How Warren Buffet Manages It

By Doug J. Eaton

“He (the investor) can be hurt by such volatility only if he is forced, by either financial or psychological pressures, to sell at untoward times.” Warren Buffet, 1987

A Question: What is $347,000,000? (answer later).

History suggests that the longer our time horizon, the less near-term volatility ends up becoming real long-term risk.

Historically from 1946- 2012 (67 years):

• 53 intra-year declines of 10% or more.

• The average intra-year decline in these 67 years was about 14%.

• 21 declines of at least 15% – an average of one every three years.

• 12 declines of at least 20% – about every 5 years (and the average of those is actually closer to 30%)

So, why in the world would anyone still choose to be an investor?

Stocks have produced positive returns the great majority of the time – over 70% of full calendar years over the last 67.

It is perfectly appropriate to feel fearful during periods of intense volatility; however, it has historically been a mistake to surrender to the fear and sell at distressed prices.

An Answer (“What is $347,000,000?”):

The amount by which Warren Buffett’s personal holdings in Berkshire Hathaway common stock declined in value in one day: “Black Monday,” October 19, 1987.

He didn’t lose a dime because:

• HE DIDN’T SELL  • THE DECLINE WAS TEMPORARY.

For the record, Berkshire Hathaway Shares stock closed that day at $3,170 a share and on 12/31/12 they closed at $134,060 per share.

The S&P 500 closed that day at 225, and on 12/31/12 at 1426.

Over the long term, PERIODIC VOLATILITY IS DEFEATED BY THE MARCH OF TIME.

Eaton Financial Group is a full service, fee-based financial advisory firm.

They focus on financial planning for the conservative investor.

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