Warren Buffett has a different perspective than most stock market declines, and it’s hard not to think he’s right. After all, Buffett is among the world’s richest billionaires and most successful investors. His view of market cycles has clearly served him well.
Here’s a look at what Buffett has to say about falling stock prices and how you can safely implement his tactics.
Net buyers of stocks
In a 2020 interview with CNBC, Buffett said “net buyers” of stocks are taking advantage of the stock market’s decline. By “net buyers,” he means investors who buy more stocks than they sell.
And guess what? You are probably a net buyer. Anyone who invests monthly in a retirement account can be a net buyer. Buy-and-hold investors are also generally net buyers.
For net buyers, lower stock prices can mean greater upside potential, assuming you continue to invest when the market drops. In Buffett’s view, net buyers should celebrate falling markets — the same way you might profit from falling food or gasoline prices.
Think of it this way. If you invest regularly and seldom sell, it makes sense to focus on stock prices when it comes to buying, not selling. And for buyers, falling stock prices are a good thing.
How Buffett celebrates falling stock prices
Buffett also puts this perspective into practice. When the stock market turns, it often accelerates its buying activity, taking advantage of falling stock prices before they disappear.
This is exactly what happened in the first half of 2022, when the S&P500 fell about 20%. Berkshire Hathawaythe Buffett-led conglomerate invested nearly $44 billion net of sales during the downturn.
When the market finally recovers, the company should see nice gains on these purchases.
How to Invest Safely in a Downturn
Investing in bear markets can increase the potential for long-term gains in your portfolio, but it’s not for everyone. Buffett obviously has unrivaled resources and decades of experience on his side. For the rest of us, buying in a downturn can be stressful.
For this reason, it makes sense to proceed conservatively. These guidelines will help:
- Don’t invest the money you will need for the next five years. Even better if you can give your investments 10 or 20 years to accumulate gains.
- Buy from companies you know. Do not use this time to speculate. Instead, look to mature companies with a proven ability to weather down economies and other crises. You can also invest in large-cap ETFs to diversify your budget.
- Invest a small amount each week or month. Small periodic investments have a lower timing risk than a large investment. Timing risk is the possibility that the price of a stock will fall dramatically immediately after it is purchased. The slow and steady approach also allows you to assess your comfort level and adjust your plan accordingly before you have tied up your savings for years.
Adopt the buyer’s point of view
Even if you choose not to increase your investment activities in this tough market, you can try to experience a net buyer’s perspective.
Instead of focusing on the decline in value of your portfolio, look for opportunities. Watch how your favorite stocks react and imagine how they might behave in a rally. You can even track a simulated portfolio on paper.
The exercise should make this market more emotionally bearable. And by the time the next bear market hits, you’ll have a strategy to get there – just like Buffett will.
Catherine Brock has no position in the stocks mentioned. The Motley Fool holds positions and recommends Berkshire Hathaway (B shares). The Motley Fool recommends the following options: $200 long calls in January 2023 on Berkshire Hathaway (B shares), $200 short puts in January 2023 on Berkshire Hathaway (B shares) and short calls of $265 in January 2023 on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.