3 ways Warren Buffett handles a falling stock market

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The FTSE 100 fell by 2.1% on Friday. The index is still up by around 100 points over the past year, but has seen major volatility over the past month. Some analysts are concerned that we could be on the cusp of a greater fall in the stock market. To help me prepare for every eventuality, I’m noting some tips from legendary investor Warren Buffett. As someone who has successfully invested through many decades, I feel Buffett is a good example for me to imitate.

Going on the offensive

One way that Warren Buffett handles a falling stock market is to go on the offensive. He once said that “opportunities come infrequently. When it rains gold, put out the bucket, not the thimble.”

The long-term trend of the stock market has been higher, so when infrequent dips come along, they represent opportunities of which I can advantage. To this end, Buffett puts out the bucket, investing what he can at that point in time. I can apply this thinking by being confident and not shying away from buying when the market is falling. A declining market should provide me with plenty of undervalued stocks. Over time, these stocks should hopefully return to a fairer — and higher — value, representing a profit.

Preparing for a slump in advance

The second nugget of wisdom I like from Warren Buffett is his belief that “predicting rain doesn’t count. Building arks does”. Even though the stock market has shown some signs that it might crash, it’s still in a good position. Trying to predict when (or if) it will crash isn’t really of much benefit to me. Being conscious that it could happen and preparing for it now will likely help me out much more.

What did Warren Buffett mean when he spoke of building arks? In my opinion, that’s about having some defensive stocks in my portfolio. These can include supermarkets, utility companies and even tobacco stocks. Such companies see steady demand for necessities whatever the state of the economy. Typically, they also offer a generous dividend yield. I’m thinking about buying some such stocks now as they should offer me some stability if things do start to get a bit rocky.

Benefiting from Buffett

The final piece of advice I’m taking on board is another quote from Warren Buffett. He said that “there is some perverse human characteristic that likes to make easy things difficult”.

If the market continues to fall, I don’t need to overly complicate everything. As mentioned above, I can buy some undervalued stocks and also pick up some defensive options. As for the bulk of my existing portfolio, I can leave it as it is. I don’t need to make things harder for myself by selling everything and then trying to buy it all back and timing the market perfectly.

By being patient and waiting for a recovery, I can avoid making a market slump more difficult than it needs to be.