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It has been a dramatic year in the stock market on both sides of the pond, with major indexes including the FTSE 100 repeatedly hitting new all-time highs.
But there have been some notable bumps along the way. The tariff-related stock market volatility in April was one.
So far, November has also seen some notable stock market volatility in the US.
So, when the stock market wobbles, are any shares safe?
No guarantees in life
The short answer is no. In practice, no share is every guaranteed to hold its stock market value. (Some specifically defined shares can be redeemed for a set cash amount, but that depends on there being enough cash to pay, so payment is still not guaranteed and anyway such shares are rare among large listed companies).
What happens when a share price falls
However, I think there are a couple of important caveats worth bearing in mind.
First, say someone buys 100 shares in a company and the share price falls. They still have 100 shares in that company. Their price may fall further, stay flat, or rise over time.
Until an investor sells a share, however, any fall in value is just what is known as a paper loss.
At any given moment, some of my shares may well be worth less than I paid for them, but as a long-term investor that does not bother me if I do not plan to sell them then.
It is also worth remembering that a share price fall reflects a change in what investors think a given company may be worth. It does not typically change the underlying value of the business itself.
Learning from Warren Buffett
Indeed, that is why investor Warren Buffett characterizes the stock market as ‘Mr. Market’, someone offering to buy or sell you a share at a given price each day without any obligation on your part to act.
By buying great shares when stock market volatility sends their price plummeting and holding onto them for a long time, some savvy investors can do very well.
Not only might they benefit from long-term price gain, for some shares they also earn dividends along the way.
As an example, consider FTSE 100 asset manager M&G (LSE: MNG).
In the March 2020 stock market crash, the share plummeted. It has since grown in value by 144%. For a period of under six years, I see that as a superb return.
But that is not all. The current yield for M&G is already a juicy 7.5%. So someone who bought in March 2020, would now be earning a monster yield of over 18% due to the lower purchase price.
Was M&G guaranteed to bounce back, or maintain its dividend?
No. No share ever is. The company faced risks such as market turbulence leading clients to withdraw more money from its funds than they put in, hurting profits. I see that as a risk even now for M&G, especially in choppy markets.
But M&G’s share price recovery did not surprise me. Then, as now, it had a strong brand, large customer base, and long experience of asset management.
When the stock market makes some investors fearful, like Buffett I look for what I think are great companies with attractive share prices from a long-term perspective.
