Prediction: A Bear Market Is Coming. Here’s Warren Buffett’s Best Advice to Prepare for Volatility
Warren Buffett, the famous former CEO of Berkshire Hathaway (BRKA -0.23%)(BRKB +0.10%), never wrote an investing book. Instead, he peppered investment wisdom into the annual reports of the company he ran, and let his thoughts slip into the interviews he conducted. What was most notable is that he didn’t give specific stock advice; he provided broad guidance.
If you think there’s a bear market on the way (give it enough time, and one will, with 100% certainty, eventually arrive), then these three pieces of Buffett wisdom could help you not just weather the storm, but use it to your advantage.
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The Buffett quotes to live by in a bear market
Investing is not a game where the guy with the 160 IQ beats the guy with the 130 IQ. Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing.
The key to investing isn’t to focus on being the smartest person in the room. While that may not hurt, it isn’t the whole story. If you are smart, but let your emotions get ahead of you, you are likely to think short-term and make mistakes that hurt your long-term performance. That’s a huge risk in a bear market, given that fear will be high on Wall Street.
Successful long-term investors have to step back, heed Buffett’s advice, and remember that every bear market has eventually been followed by a bull market. And those bull markets have historically driven the market to new heights. A bear market isn’t the end of the world; it is just a normal part of investing.
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Our favorite holding period is forever. We are just the opposite of those who hurry to sell and book profits when companies perform well but who tenaciously hang on to businesses that disappoint.
Buffett liked to buy good companies when they traded at attractive prices. But the real magic was his willingness to hold for the long term. His goal was to benefit from a business’s growth over time, which can only occur if you buy a stock and hold it. This is sage advice for a bull market or a bear market, but it is particularly important in a downturn.
What you don’t want to do is sell a good business just because the market is going down. If it is a good business, it will survive and, perhaps, even thrive during the downturn. If you are being as selective as Buffett, a bear market shouldn’t be enough to ruin your investment thesis on a stock.
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Be fearful when others are greedy and greedy when others are fearful
Let’s assume you take the first two Buffett quotes to heart, controlling your emotions and holding for the long term. Then a bear market switches from something to fear to an opportunity. You are most likely to find good companies trading at attractive prices while everyone else on Wall Street is running scared. It can be a great time to pick up a new investment you’ve long admired, but couldn’t justify the price of.
You may even own some great businesses that end up with temporarily depressed stock prices. Why not buy some more shares? The point is, when you think long-term, the script switches; you aren’t trying to make a quick buck, which allows you to invest differently from the pack. But, as the quote also notes, during periods of extreme exuberance, like today, you should be leery of “hot” stocks. And be preparing yourself for an eventual bear market.
You have to pick your own style of investing
Buffett’s long-term investment success made him a Wall Street icon, and his insightful wisdom will keep him in investors’ hearts and minds for generations to come. That said, the best part about all of these Buffett quotes is that they don’t tell you how to pick stocks. You get to decide that for yourself. Are you a dividend investor, a growth investor, a value investor? It doesn’t matter. The quotes all still apply.
Today, as Wall Street increasingly worries about a bear market, you should strongly consider taking the Oracle of Omaha’s advice: control your emotions, invest for the long term, and use downturns as an opportunity to buy good businesses.
Source: www.fool.com — article syndicated from the publisher’s feed; all rights remain with the original publisher.