Ducking Market Crashes The Buffett-Shiller Way

Ducking Market Crashes The Buffett-Shiller Way

An article in Forbes offers an approach for protecting yourself against market volatility, named the Buffett-Shiller method for the two market watchers who inspired it. Rather than a formula for beating the market, this approach will lower the risk of panic-selling when the market hits bottom or getting overly confident during the peaks.

Thinking like Warren Buffett, investors should look at shares as slices of businesses that they want to own for a long time. Rather than obsessing over whether the share prices go up or down from week to week, focus on long-term earnings; the businesses you buy should provide profits 10, 20, 30 years from now that you can live off of. Meanwhile, Yale economist Robert Shiller’s argument is that stock price volatility does not align with the volatility in corporations’ future growth, and that while expectations of future dividends grow and shrink over time, it’s nothing compared to the roller coaster ride of stock prices. The force behind that roller coaster is up for debate; it could be massive sell-offs or a phenomenon like the recent meme stock craze, but whatever it is, that monthly volatility isn’t important to investors. His approach would have investors spend decades gradually building up the shares in your portfolio and then 25 years slowly selling them off, without much attention paid to monthly volatility.

Of course, earnings fluctuate. A key part of value investing, and Shiller’s “cyclically adjusted price/earnings” or CAPE ratio is looking at 10 years of earnings instead of just one, the article maintains. But many companies distribute profits differently; Buffett’s Berkshire Hathaway distributes earnings via stock buybacks, while other companies such as Artisan Partners Asset Management distributes earnings through cash dividends.

Focusing on value over price, you may experience some disappointing dips, but you’ll remain steady while others are panicking during bear markets, maintaining a “buy-and-hold” approach. Buffett has often said that his favorite holding period is “forever” and many of Berkshire’s assets have been in their portfolio for decades. But Wall Street often fixates on price over value, and using that measure highlights Berkshire’s $44 million loss stemming from a drop in prices of the publicly-traded stocks in the company’s holdings. But Berkshire’s real earning strength comes from the businesses that it holds stakes in, not in its ability to beat the market—something Buffett has never pretended to even know how to do. And while the Buffett-Shiller approach put forth in the article may not give you the magic formula to do that, it can give you something else to focus on during the choppy waters of the current bear market.


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