Why Warren Buffett Thinks Volatile Markets Are Not Risky

The Straits Times Index  (SGX: ^STI) has been volatile over the past month.

In August, the index swung from an intraday high of 3214 points to an intraday low of 2808 – that’s a gap of more than 10% within a month.  Some might come to see volatile markets as risky and would prefer to come back when markets “stabilize.”

When markets behave like a rodeo ride, it can feel dangerous. But, there’s one important investing figure who doesn’t think that volatility should be seen as risk.

One man’s view on volatility

Warren Buffett’s that important investing figure.

He has been the leader of the U.S-based conglomerate Berkshire Hathaway since 1965. From then till 2014, Buffett has helped Berkshire’s per-share book value (a good proxy for the intrinsic worth of the business) grow by a phenomenal compound annual rate of 19.4% (that’s a total growth of 751,113% in 50 years!) through astute acquisitions of private companies and investments in stocks.

In his 2014 annual letter to Berkshire’s shareholders, Buffett had this to say:

“Volatility is far from synonymous with risk.

It is true, of course, that owning equities for a day or a week or a year is far riskier (in both nominal and purchasing-power terms) than leaving funds in cash-equivalents. That is relevant to certain investors — say, investment banks — whose viability can be threatened by declines in asset prices and which might be forced to sell securities during depressed markets. Additionally, any party that might have meaningful near-term needs for funds should keep appropriate sums in Treasuries or insured bank deposits.

For the great majority of investors, however, who can — and should — invest with a multi-decade horizon, quotational declines are unimportant.”

Phrased in another way, Buffett believes that temporary share price declines are less important. That’s especially so if you have a good grasp of what the value of the company is. Meanwhile, less volatile instruments – like cash, for instance – may not be safer as their real purchasing power can be eroded by inflation over time.

Foolish summary

The late Benjamin Graham – who’s Buffett’s famous investing mentor – once said that the stock market behaves like a voting machine in the short run but a weighing machine over the long-term.

It follows that Buffett’s more concerned about whether there is a permanent loss of value in his companies and less so on where the share prices of his investments are on a minute-by-minute or even month-by-month basis.

For investors with a long term view, it’s a company’s business fundamentals (the ‘weight’) that we should be watching.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chin Hui Leong owns shares in Berkshire Hathaway.