Warren Buffett Explains Why Risk Is Key to Smart Investing and Not Your Enemy

Market volatility tends to stress out investors. A down day for the Dow can induce anxiety, and a sudden market rally can entice amateur investors to chase stocks they don’t really understand. However, for Buffett—the legendary investor whose name has become almost synonymous with both discipline and long-term investing—market swings are not to be feared, but to be used, as long as you know what you’re doing.

“Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it,” Buffett has said.

The logic of this statement becomes clear when you consider investor psychology. While many reflexively shy away when prices fall, Buffett leans in. He has spent his career capitalizing on what he often calls “folly”—when the market as a whole seems to get the value of an underlying business wrong. Buying such “mispriced” companies, as Buffett sees it, has been his strategy for the best long-term investments.

Why Buffett Doesn’t Run From Volatility

The reason Berkshire Hathaway Inc. (BRK.A, BRK.B) has been free to act aggressively during times of market stress is rooted in Buffett’s definition of risk. For Buffett, volatility doesn’t necessarily make a company riskier. However, it may just make it cheaper—at least temporarily. If the underlying business is durable, predictable, and well-managed, a lower price tag can be a stroke of luck.

But to have a shot at capitalizing on volatility, you first need to understand what you are buying. Buffett has said this clearly:  “Risk comes from not knowing what you are doing.”

In his view, the primary investment risk stems from a lack of understanding of what one is doing. Buying something you don’t fully understand is a recipe for folly. This may be a company with a fragile balance sheet or a momentum stock with no obvious path to earnings. It could also be in a market sector that is new and faddish or for which you don’t have the experience or knowledge to analyze correctly.

This is why Buffett says to limit your investing to your “circle of competence”—businesses and industries you can confidently assess. When you understand how a company generates revenue, why customers value it, and what gives it a competitive edge, short-term price fluctuations matter less. Information and knowledge are your protection.

The Other Volatility: Emotional Reactions

While smart investing means you should always do your due diligence and research, one factor remains more unpredictable: human behavior. Fear, greed, impatience, herd mentality, and other natural emotions drive markets almost as much as earnings reports and interest rates do. Buffett’s investing philosophy is one that counters reactive behavior: an investor’s temperament can matter more than their technical know-how.

Treating volatility as an opportunity can thus help keep you from making emotional decisions. By accepting market noise as inevitable and recognizing that it often creates value, you can keep an even keel when others might panic.

How To Apply Buffett’s Wisdom

You don’t need to be Warren Buffett to put his approach to volatility into practice. His advice works at almost any scale:

• Buy quality companies at a discount during downturns.
• Think like an owner. Stocks are not lottery tickets. 
• Be patient and wait for quality businesses to become available at attractive prices.
• Only invest in what you can understand. 
• Look for volatility to provide you with better entry points, not panic signals.

In short, Buffett’s approach encourages investors to change their mental model around risk and volatility. Market movements on their own are not always a problem. It’s not knowing what you are doing that is the main issue. Once you substitute understanding for fear, the market is a far less intimidating place.