Warren Buffett has a different perspective on stock market declines than most, and it’s hard not to think he’s right. After all, Buffett is one of the world’s richest billionaires and most successful investors. His view of market cycles has clearly served him well.
Here’s what Buffett has to say about falling stock prices and how to safely apply his tactics.
Net stock buyers
In a 2020 interview with CNBC, Buffett said that “net buyers” of stocks benefit when the stock market falls. By ‘net buyers’ he means investors who buy more shares than sell.
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 usually net buyers.
For net buyers, lower stock prices can mean greater earning potential, assuming you keep investing when the market falls. According to Buffett, net buyers should celebrate down markets — in the same way you could benefit from lower food or gas prices.
So think about it. If you invest regularly and don’t sell often, it makes sense to focus on stock prices as they relate to buying, not selling. And for buyers, lower stock prices are a good thing.
How Buffett Celebrates Lower Share Prices
Buffett also puts this perspective into practice. When the stock market changes, he often ramps up his buying activity — taking advantage of those lower stock prices before they disappear.
This is exactly what happened in the first half of 2022, when the S&P 500 decreased by about 20%. Berkshire Hathawaythe conglomerate that Buffett runs invested nearly $44 billion in sales during the dip.
When the market eventually recovers, the company can make some nice profits on those purchases.
How to Invest Safely in Recessions?
Investing in down markets can increase your portfolio’s long-term profit potential, but it’s not for everyone. Buffett clearly has unparalleled resources plus decades of experience by his side. For the rest of us, buying a recession can be stressful.
For that reason, it is smart to move forward conservatively. These guidelines will help:
- Don’t invest money that you have to spend in the next five years. Even better if you can give your investments 10 or 20 years to build profits.
- Buy companies you know. Do not use this time to speculate. Instead, lean on mature companies with a proven ability to weather downturns and other crises. You can also invest in large-cap ETFs for diversification on a budget.
- Invest a small amount each week or month. Small, periodic investments have a lower timing risk than one large investment. Timing risk is the chance that a stock’s price will drop drastically right after you buy it. The slow and steady approach also allows you to gauge your comfort level and adjust your plan accordingly before you lock in your savings for years.
Embrace the buyer’s prospects
Even if you choose not to expand your investment activity in this difficult market, you can try experimenting with the prospects of a net buyer.
Instead of focusing on how much the value of your portfolio has fallen, look for opportunities. Watch how your favorite stocks react and imagine how they would fare in a recovery. You can even track a simulated paper wallet.
The exercise should make this market more emotionally bearable. And by the time the next downside market rolls around, you’ll have a strategy to work through it — just like Buffett will.
Catherine Brock has no position in any of the listed stocks. The Motley Fool holds positions in and recommends Berkshire Hathaway (B shares). The Motley Fool recommends the following options: long January 2023 Berkshire Hathaway calls on Berkshire Hathaway (B-shares), short January 2023 on Berkshire Hathaway (B-shares) and short January 2023 $265 calls on Berkshire Hathaway (B-shares). The Motley Fool has a disclosure policy.