Warren Buffett’s Only Advice on How to Perform in Any Volatile Market

Simple but ultra-effective advice.

Sylvain Saurel
Nov 8, 2020 · 6 min read
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Image: Warren Buffett

The year 2020 had started better than ever for the U.S. stock market. The Dow Jones and the S&P 500 were at record levels. Donald Trump kept boasting of his “formidable” economic record at the head of the United States.

Many even thought that the Dow Jones would eventually pass the 30,000 points mark in the year 2020.

And then the unimaginable happened. A pandemic on a scale not seen in decades seized the world. Spreading around the world at high speed, the coronavirus pandemic forced most countries in the world to implement a total lockdown for several weeks.

An economic crisis on a scale not seen in decades has taken over the world in 2020

This then triggered the economic crisis that had been expected for months.
This economic crisis of 2020 was also unusually violent. From then on, it became clear that Donald Trump would have a hard time being re-elected President of the United States for a second term.

The uncertainty surrounding the coronavirus pandemic and the lockdown caused a liquidity crisis at the end of March 2020 that caused all liquid markets to plunge. The Dow Jones went from 29,500 points to 18,500 points in just over 20 days.

Under these conditions, all investors found themselves lost.

Fortunately, the Fed came to the “rescue”, showing the way forward. The Fed decided to lower interest rates to zero before announcing an unlimited quantitative easing program to support the U.S. economy until a coronavirus vaccine is made available to the public.

Driven by the TINA phenomenon, for “There Is No Alternative,” individual investors jumped into the stock market. After that, TINA succeeded in the FOMO effect. Everyone was afraid to miss this rise.

The actions taken by the Fed have created a Tech bubble

The result was the creation of a veritable bubble around the Tech companies on the stock market. Tech companies broke all their records in the summer of 2020 in terms of market cap. Apple even became the first American company in history to surpass a market cap of $2,000 billion.

Tesla saw its share price skyrocket. Elon Musk’s company now has a market cap of more than $400 billion, which is more than the combined market caps of the world’s 15 largest automakers.

The Dow Jones returned above 29,000 points in early September 2020 while the S&P 500 broke records.

The approach of the American election brought uncertainty to the financial markets which led to further corrections at the end of October 2020. The Dow Jones fell by 26,000 points.

Finally, the prospect of Joe Biden’s election seems to satisfy the markets since the Dow Jones has fallen back above 28,300 points in a few days at the time of writing.

Investors are in full doubt about the best strategy to adopt for the coming months

This significant volatility of the U.S. stock market since March 2020 has put investors in doubt at the moment.

The questions that come up most often are of this nature:

To begin with, I will reassure you. I don’t have a crystal ball at my disposal.

Therefore, I cannot guarantee that there will be, or that there will not be, a stock market crash in the weeks and months to come. I can only share my feelings with you. It is therefore only an opinion.

I think that a stock market crash will occur sooner or later that will allow the stock market to reconnect with the real economy. Nevertheless, the Fed seems determined to continue its aggressive monetary policy and to print as many U.S. dollars out of thin air as necessary.

Under these conditions, the situation could remain this way until a coronavirus vaccine is made available to as many people as possible.

Even so, you cannot stay with a mountain of cash at your disposal in your bank account. It would be suicidal because the effects of the great monetary inflation we are experiencing are constantly devaluing the cash you have in your possession.

You must therefore make decisions to make the best use of your cash during this period of economic crisis.

Warren Buffett explains all the good things he thinks about DCA strategy

This is where Warren Buffett comes in. Known as one of the greatest investors of all time, Warren Buffett has enjoyed a lifetime of lasting success that commands respect. When it comes to the Oracle of Omaha, we need to listen.

Warren Buffett has just explained again that the best strategy to perform in a volatile market is to practice Dollar-Cost Averaging (DCA).

This well-known strategy consists of buying shares at regular intervals with a predefined amount of money. This allows you to smooth your costs. When you are in a volatile market, this strategy is particularly effective.

In the current context, Warren Buffett, therefore, advises employing dollar-cost averaging to buy shares of S&P 500 index funds. In this way, you get exposure to the broader market, and you don’t put your money into a single stock.

Warren Buffett advises using DCA on S&P 500 index funds

Warren Buffett has always been a fervent supporter of index funds, which he considers an excellent way to increase his wealth over time. Besides, it allows less experienced investors to free themselves from the work of checking individual stocks.

It is, therefore, no coincidence that Warren Buffett places “The Little Book of Common Sense Investing” from John Bogle among his 10 favorite books, which he recommends that anyone who wants to succeed in the stock market should read at least once.

Founder of The Vanguard Group, John Bogle is a very important figure in finance, considered to be the father of index funds. Warren Buffett has always been a great admirer of John Bogle.

Many consider the book “The Little Book of Common Sense Investing” as the investment bible offering new information, new perspectives, and new points of view. In other words, this book is essential to a better understanding of the markets.

John Bogle describes the simplest and most effective investment strategy for building long-term wealth: buying and holding, at very low cost, a mutual fund that tracks a broad stock market index like the S&P 500.

Conclusion

If you want to be able to apply Warren Buffett’s advice to perform in any volatile market, you know what you have to do. Start by reading this book by John Bogle, then move on to the DCA strategy.

This will allow you to smooth out your costs and profit from the stock market over the long term while keeping your risks to a minimum. The most amazing thing is that this strategy is the one that is generally used in the Bitcoin market, which is also a volatile market.

This is amusing because Warren Buffett is a fervent opponent of Bitcoin which he calls “Rat poison squared”. Yet the strategy he recommends also works wonders in the Bitcoin world. So you can use it beyond the stock market as well.

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Sylvain Saurel

Written by

Entrepreneur / Developer / Blogger / Author. In Bitcoin We Trust: https://www.inbitcoinwetrust.net

The Power of Knowledge

Knowledge is the key to getting better and better every day. The publication is aiming to provide you with stories on different topics to help your better understand the world: personal development, productivity, motivation, inspiration, money, finance, racism, women, …

Sylvain Saurel

Written by

Entrepreneur / Developer / Blogger / Author. In Bitcoin We Trust: https://www.inbitcoinwetrust.net

The Power of Knowledge

Knowledge is the key to getting better and better every day. The publication is aiming to provide you with stories on different topics to help your better understand the world: personal development, productivity, motivation, inspiration, money, finance, racism, women, …

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