Watching the stock market these days is like being on a roller coaster - but it does not have to be. An investor would do well to think about the stock market as a person who is sometimes rational, yet sometimes irrational, always emotional, and subject to manic fits. Do not let Mr. Market guide you, but rather take advantage of his fearful moments to buy great businesses with good long-term economics, when these companies are selling at reasonable/advantageous prices.
Another way to look at it is to see the market as an auction, where people bid every day on all public companies. You can either buy or not. When the people at the auction are depressed and bidding really low for excellent companies, you would want to put in a bid and buy. If you knew of a local aptartment building or farm and you knew it was great and had a wonderful history and future, but everyone in town showed up to the auction depressed for a variety of factors, and was bidding low incorrectly, then you should bid and buy this wonderful building or farm at this low price.
Warren Buffett's best purchases were made in recessionary-depressed markets.
Charles Munger, his partner, has said that they accomplished the results they did by avoiding mistakes and taking advantage of inanities - and thereby buying excellent businesses when somebody was foolishly throwing them away based on emotion.
Often people do not throw away a great business. But often you can buy a great business at a fair-reasonable price. There are many like that now.
I would say this basket of companies should be bought when opportunistic pricing is presented by a foolish market: Berkshire Hathaway (BRK.A), Kraft Foods (KFT), Procter & Gamble (PG), General Electric (GE), Diageo (DEO).
Another good strategy is to consistently buy shares of a great fund like Gabelli Equity Trust (GAB) . Just owning some of Berkshire and Gabelli is wonderful because you get to see what Warren Buffett and Mario Gabelli are buying.
If one has cash and is diversified in good businesses that pay dividends, one can stay the course.
The next months may be very tough. But Warren Buffett has said good businesses will be worth more in five or ten years.
One thing I would add is that it's not a good idea to buy companies with average to bad economics just because they are cheap. These businesses can get cheaper. Stick to buying clear winners - companies that are inevitably going to do well like Coke (KO), PG, Wells Fargo (WFC) and such; you do yourself a huge favor by just not making mistakes. That's how they won at Berkshire. Stick to the obvious, and don't try to jump seven foot hurdles - go for the one-foot easy hurdles.
Buffett uses the example of Ted Williams, a baseball player with a great batting average. He used to only swing at fat pitches and that's what you want to do. Wait for an obvious fat pitch (like Coke, if it gets cheap). This is a great company and one can buy shares when they are reasonably priced and do well over time.
Disclosure: The author is long BRK.B, KFT, PG, GE, DEO, GAB.