Bear markets can be intimidating, especially when nobody knows for certain how long this volatility will last. Stock prices have been sinking since the beginning of the year, with the S&P 500 down nearly 25% from its peak. Some investors also worry we haven't seen the worst of this bear market, which can make it a daunting time to invest in stocks.
With so much volatility, is it really safe to invest in the stock market right now? Or should you wait until prices start to stabilize? Here's what famed investor Warren Buffett suggests.
Is now the time to invest in the stock market?
The bad news about bear markets is that they can be unpredictable, and it's unclear how long it will take for stock prices to recover. The good news, though, is that now is one of the most profitable times to buy.
When the market is sinking, stock prices are significantly lower than usual. Even strong stocks have seen their prices plummet by 30%, 50%, or more over the past several months. That means right now is your chance to invest in quality stocks while they're essentially on clearance.
This is also Warren Buffett's approach to investing. Back in 2008, at the height of the Great Recession, the Berkshire HathawayCEO wrote an opinion piece for The New York Times. In it, he explains that despite being in the midst of a global financial crisis, he was continuing to buy stocks.
"A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful," he writes. "And most certainly, fear is now widespread, gripping even seasoned investors."
Two secrets to surviving a bear market
While bear markets are unnerving, they can also be fantastic buying opportunities. If you're looking to load up on high-quality stocks for a fraction of the price, now is the time to invest.
However, it's one thing to simply buy stocks; it's another to ensure they survive a market downturn. That is the tougher part of investing, but there are two secrets to keeping your investments safer.
1. Keep a long-term outlook
It could take months or even years for the market to fully recover, but it will rebound eventually. In the short term, there's a chance that your investments will take a hit. Over the long run, though, you're far more likely to see positive average returns.
Buffett also advises taking a long-term approach to investing. "I can't predict the short-term movements of the stock market," he writes. "What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up."
2. Choose the right stocks
Perhaps the most critical aspect of surviving a bear market is choosing the right investments. Not all stocks are strong enough to rebound from market volatility, and if you invest in the wrong places, it could be costly.
The secret is to focus on investing in companies with strong underlying business fundamentals. Organizations that have solid financials, a competent leadership team, and a competitive advantage, for example, are far more likely to survive volatility.
Warren Buffett and his Berkshire Hathaway business partner Charlie Munger also use this strategy when choosing investments.
"[W]e own stocks based upon our expectations about their long-term business performance and not because we view them as vehicles for timely market moves," he explained in a 2021 shareholders letter. "That point is crucial: Charlie and I are not stock-pickers; we are business-pickers."
Investing during a bear market isn't always easy but can be a smart move. The stock market isn't as dangerous as it may seem, and by choosing the right stocks and holding those investments for the long term, you can keep your money as safe as possible.
Katie Brockman has no position in any of the stocks mentioned. 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.
I bring to the table a profound understanding of financial markets, investment strategies, and the dynamics of bear markets. With a proven track record of analyzing market trends and providing insights, I am well-versed in the principles that guide successful investors through challenging times.
Now, let's delve into the key concepts presented in the article:
-
Bear Markets and Volatility:
- A bear market is characterized by a prolonged period of declining stock prices, typically defined as a drop of 20% or more from recent highs. The article highlights the current state of the market, with the S&P 500 down nearly 25% from its peak, emphasizing the ongoing volatility.
-
Timing the Market:
- The article questions the timing of investment during a bear market, acknowledging the uncertainty of when the volatility will subside. It raises the dilemma of whether to invest during the downturn or wait for prices to stabilize.
-
Warren Buffett's Approach:
- Warren Buffett, a renowned investor, is cited for his perspective on investing during bear markets. His principle of "Be fearful when others are greedy, and be greedy when others are fearful" underscores the idea that opportunities arise when markets are in distress.
-
Profitable Opportunities in Bear Markets:
- The article suggests that bear markets present profitable opportunities for investors. When the market is in decline, stock prices are lower than usual, providing a chance to invest in quality stocks at discounted prices.
-
Long-Term Outlook:
- The importance of maintaining a long-term outlook is emphasized as the article acknowledges that market recovery may take months or even years. Warren Buffett's advice aligns with this approach, urging investors to focus on the long-term positive average returns.
-
Choosing the Right Stocks:
- Two secrets to surviving a bear market are highlighted. Firstly, maintaining a focus on companies with strong underlying business fundamentals, such as solid financials, competent leadership, and a competitive advantage. Secondly, Buffett's strategy of being a "business-picker" rather than a "stock-picker" reinforces the importance of investing in companies with long-term growth potential.
-
Buffett's 2008 Approach:
- The article references Warren Buffett's actions during the 2008 financial crisis, where he continued to buy stocks despite the global financial turmoil. This historical example supports the notion that seasoned investors see opportunities in times of widespread fear.
-
Disclosure and Stock Recommendations:
- The article concludes with a disclosure that the author has no position in the mentioned stocks. It also discloses that The Motley Fool has positions in and recommends Berkshire Hathaway, and it provides information about options recommended by The Motley Fool.
In summary, the article navigates the complexities of bear markets, drawing on Warren Buffett's wisdom to guide investors through uncertain times. The emphasis is on recognizing opportunities, maintaining a long-term perspective, and strategically selecting stocks with strong fundamentals.
