On Wednesday, Oct. 1, the Dow Jones fell by nearly 250 points in a pretty massive sell-off. And, you may be surprised to learn that Warren Buffett loved every minute of it.
In an interview with CNBC the very next day, Buffet said that he bought stocks while the markets were selling off. He wouldn't name individual companies, but did say they were "names you'd recognize."
As a long-term investor, this is one of the best lessons you can possibly learn. You want the market to sell off sometimes so you can buy more shares of great companies at a discount.
Celebrate stock market sales
Just like buying clothes at your favorite department store, stocks can go on sale from time to time. And, just like clothes, the cheaper the price, the more attractive the purchase should look.
Investors' fear is the number one reason for market sell-offs. Not fundamentals, company-related news, or any other logical reason. To illustrate this, let's take a look at one of my favorite stocks – Citigroup (NYSE:C).
Now, I love Citigroup as a long-term play on the recovery of the banking industry. I think that the stock will significantly outperform the rest of the sector as well as the overall market over the coming years. Capital levels have improved tremendously and the company continues to lessen its exposure to its "legacy" assets.
During the Oct. 1 sell-off, Citigroup shares lost 1.5% of their value. Nothing really changed in regards to the company itself. Rather, investors' fear of ISIS, Ebola, and other global issues simply gave them the jitters and caused the market to sell-off.
So, Citigroup looks even more attractive to me now. My original reasons for liking the stock still apply, and now shares can be bought for less money.
As Buffett said on CNBC, "I like buying it as it (the market) goes down, and the more it goes down, the more I like to buy."
Do not flee with the crowds
When the market sells off, or even worse – has a correction, the absolute worst thing you can do is to panic and sell. Over the long run, doing this on a regular basis almost guarantees that you'll lose money.
By selling, you're effectively saying that the original reasons you bought the stock no longer apply. This is just a silly way to invest.
It is common knowledge that the whole point of investing is to buy low and then sell high at some future date. Unfortunately, many investors do the exact opposite. They buy stocks when they've been on a hot streak and then panic and sell as soon as a rapid drop in the market takes place.
Keep some cash on the sidelines for these situations
One very common mistake among investors is to be fully invested at all times. In other words, if someone has $10,000 in their brokerage account, he or she owns $10,000 in stocks and other investments, or very close to it.
It is always a good idea to keep some cash on the sidelines, for situations like the Oct. 1 sell-off. Let's say that the correction that everyone keeps warning us about finally arrives in full swing, and the market loses 15% of its value. Well, if you have all of your money in stocks, you'll probably lose about 15% of your portfolio.
However, if you only have, say, 80% of your money invested when the correction comes, you'll be able to snag great buying opportunities in good companies that got beaten down for no other reason than the entire market corrected.
Keeping some cash on the sidelines lets you take advantage of buying opportunities as well as limits your losses when the market drops.
Buy all the time... when the market is cheap, and when it's expensive
The smartest investors in the world (like Buffett) buy stocks no matter what the market is doing. If you can buy a good company for a good price, who cares that the overall market looks expensive?
One good rule of thumb that has served me well is to ask yourself this question: If a stock you're thinking about buying went up by 5%, would it still look like an attractive buy to you? If the answer is yes, go ahead and buy it. If the answer is no, maybe you need to reevaluate your reasons for liking the company in the first place.