When the market falls off a cliff, as it has recently, what can investors do to salvage what remains of their portfolios and position themselves for an eventual recovery?

Well, one idea is to emulate investing masters, especially those who have been through other times of market turmoil like the 1970s bear market, the 1987 crash, or even the 2001-2002 bear market.

If we find a company we like, the level of the market will not really impact our decisions. We will decide company by company. We spend essentially no time thinking about macroeconomic factors. In other words, if somebody handed us a prediction by the most revered intellectual on the subject, with figures for unemployment or whatever it might be for the next two years, we would not pay any attention to it. We simply try to focus on businesses that we think we understand and where we like the price and management.

Those words were spoken by Warren Buffett at the 1992 Berkshire Hathaway annual meeting, and in that brief paragraph he's given us two important lessons. Lessons we need to learn -- and relearn if we've forgotten -- if we are to come out of this bear market with any chance at wealth in the future.

Business, not paper
The first lesson is that buying shares of stock is about the business, not the slips of paper. Buffett buys businesses that have great earnings power, not stocks that might double (though one could certainly lead to another).

That's why he didn't sell Coca-Cola (NYSE:KO), even though the share price flat-lined for more than two years in the early 1990s, just a few years after he bought it in 1988. But while the stock stalled, net income and free cash flow continued to climb. Only belatedly did the market realize what the business was doing, and the stock soared some 300% before sputtering again in 1998. Just staying with that business has led to a 600% gain overall for him, even including the recent fall.

When you look for investing opportunities, keep Coke in mind. For instance, each of the following were essentially flat in share price during the bull run ending in the fall of 2007, but their earnings grew significantly. I chose that time period because everything's declined recently, but these went unrecognized while the market was climbing and are still good businesses today.


% Stock Price Change, 2 Years Ending 9/30/07

Annual Growth in Earnings, Same Period

Qualcomm (NASDAQ:QCOM)



Regions Financial (NYSE:RF)



Walgreen (NYSE:WAG)



Source: Capital IQ, a division of Standard & Poor's.

You want to treat investing as if you're buying the business, not the slips of paper called stock. As Buffett said, "When I buy a stock, I think of it in terms of buying a whole company, just as if I were buying the store down the street."

Business, not macroeconomics
The second lesson is this: While presidents have to worry about the economy -- remember, "It's the economy, stupid!"? -- investors should not, at least not as much.

Will a rise in unemployment affect Johnson & Johnson's (NYSE:JNJ) business and how many Band-Aids or stents it sells? Will a slowdown in consumer spending affect the revenue and earnings of Best Buy (NYSE:BBY)? Sure they will. But Buffett seems to be saying that macroeconomic considerations should not be your only reason -- or even your primary reason -- for deciding to buy or avoid such companies. A down economy is a temporary speed bump for great businesses, not a  game-changer.

For instance, if you're interested in a miner such as Vale (NYSE:RIO), look to see that it can extract the metal out of the ground more cheaply than its competitors by controlling costs, is not unduly leveraged, and can make a profit over a reasonable range of metal prices. That's looking at the business, not just the macroeconomic concern that gold is a good hedge for a doomed dollar and therefore a miner is mandatory for your portfolio.

The market's moods often reflect people's worry or enthusiasm about the economy as a whole. But to an investor, as Buffett said, "The market is there only as a reference point to see if anybody is offering to do anything foolish. When we invest in stocks, we invest in businesses."

Focused investors
These two lessons from Buffett are just as relevant today as they were 17 years ago. Applying them to your own investing process can help you bring your portfolio back from the brink.

At Motley Fool Inside Value, co-advisors Philip Durell and Ron Gross apply these two lessons from Buffett while seeking out the undervalued companies in today's market. By looking at the business behind the tickers, they've managed to beat the S&P 500 over the four-and-a-half years of the service. To see what companies they think are undervalued today, check out a free 30-day trial.

Fool contributor Jim Mueller owns shares of J&J, Coke, and Berkshire, but no other company mentioned. Johnson & Johnson and Coca-Cola are Income Investor recommendations. Berkshire Hathaway, Coca-Cola, and Best Buy are Inside Value picks. Berkshire Hathaway and Best Buy are also Stock Advisor selections. The Fool owns shares of Berkshire Hathaway and Best Buy. The Fool's disclosure policy goes well with Coke.