Stock market investors have had a hard time so far this year. Key market benchmarks are significantly lower than they were at the start of the year, and every time Wall Street seems to have regained its footing, a new concern sends stocks reeling again.
For those with money to invest, falling markets pose a mystery. On the one hand, stock prices for thousands of stocks are much more attractive than they were a year ago. So if you still believe that a company’s business will thrive over the long term, it’s a golden opportunity to invest in more stocks at lower prices. On the other hand, no one wants to buy a stock only to see it continue to lose ground.
So, should you buy stocks now or wait for a future sign? To gain insight into this question, it helps to turn to the words of legendary investor Warren Buffett. That Berkshire Hathaway (BRK.A 0.43%) (BRK. B 0.64%) The CEO has seen many bear markets in his long career as an investor, and his long-term investment approach has paid off through thick and thin with market-shattering returns. Here’s what Buffett has offered as advice to those trying to decide whether to invest or wait during tough times.
Buffett’s advice for active investors
Buffett has a few ideas for active investors that might seem contradictory at first. When you think about it, however, the net benefit is being aggressive but selective in picking stocks to buy in tough market conditions.
Buffett’s aggressive nature shines through in several statements. In the 2010 letter to shareholders, Berkshire’s CEO wrote, “Great opportunities rarely come. When it rains gold, grab a bucket, not a thimble.” This post-financial crisis approach proved quite timely, as the ensuing bull market lasted into the 2010s and was one of the most successful periods in stock market history. It also reinforces his much more commonly quoted aphorism: “Be greedy when markets are fearful.”
But Buffett’s success has largely come from being selective about his investments. Fortunately, difficult times present great opportunities to discover the truth about business. “You only find out who swims naked when the tide goes out,” says the letter to shareholders published in 2002. Even poorly run companies can do well in bull markets, but bear markets separate the wheat from the chaff.
Additionally, Buffett doesn’t hesitate to hold back on investments he’s not entirely sure about. As he was quoted as saying at the Berkshire shareholders’ meeting in 1999, “The stock market is a no-called-strike game. You don’t have to hit everything. You can wait for your pitch.”
Buffett’s Advice to Less-Active Investors
Not everyone wants to spend a lot of time figuring out which companies are most likely to outperform their competitors. For the less active investor, Buffett also has a simple piece of advice: average dollar costs when using index funds.
Specifically, here’s what Buffett told investors at Berkshire’s 2004 annual meeting: “If you build a low-cost index fund over 10 years with fairly regular amounts, I think you’re probably going to do better than 90% of the people around you who are using it.” start investing at a similar time.”
Fortunately, there are many such investment vehicles for those who don’t want to get into individual stocks. Tracking popular indices like the S&P500 or even the entire stock universe is possible through mutual funds and exchange-traded funds, many of which charge investors an annual fee of 0.1% or less.
The right answer for you
The most important characteristic of successful investors is an investment strategy. However, what this strategy looks like can differ between investors without sacrificing the potential for success. Buffett clearly understands this, which is why he recognizes that different strategies work better for different people.
In general, however, Buffett has a strong belief in bucking market trends, pursuing bargain opportunities, and suppressing his emotions. The times when you’re probably most afraid to invest have historically been the best times to put your money to work in the markets, and even if you don’t jump in now, you won’t want to wait too long before you do get solid investment plan in place.
Dan Caplinger has positions in Berkshire Hathaway (B shares). The Motley Fool has positions in and recommends Berkshire Hathaway (B shares). The Motley Fool recommends the following options: long January 2023 $200 calls on Berkshire Hathaway (B shares), short January 2023 $200 puts on Berkshire Hathaway (B shares), and short January 2023 $265 calls on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.