Allow me to summarize an article that describes why Warren Buffett became one of the premiere oracles of the markets. His wisdom is worth noting.
Last year, economic headwinds hit the stock market like a wrecking ball, and the results were downright devastating for many investors. The S&P 500, the Dow Jones Industrial Average, and the Nasdaq Composite dropped into a bear market as Wall Street reacted to runaway inflation and rising interest rates. In fact, all three indexes suffered their sharpest declines since the financial crisis of 2008. (Remember that in 2009 the market was up over 24%). Widespread fear creates buying opportunities
Warren Buffett discussed major stock market declines in Berkshire Hathaway's 2016 letter to shareholders, and one comment jumps off the page: "Widespread fear is your friend as an investor because it serves up bargain purchases."
Those words are quite relevant today. Many stocks that are brimming with future potential have fallen sharply on recession fears, but economic downturns are a temporary phenomenon with little bearing on the long-term growth trajectory of a quality business. That means obsessing over the possibility of a recession is a waste of time. Investors should ignore the short-term noise and, instead, ask themselves which businesses will be better off a decade down the road. Buying stock in those businesses today will almost certainly produce a positive result in the long run.
It's worth mentioning that Buffett follows his own advice. Berkshire Hathaway invested $66 billion in stocks through the first three quarters of 2022, which is more than the company invested during the previous three years combined.
Buffett once summarized the secret to making money in the stock market in a single sentence: "All there is to investing is picking good stocks at good times and staying with them as long as they remain good companies."
Right now, is undoubtedly a good time to invest; many wonderful stocks are trading at bargain prices. But that knowledge is only half the battle. After identifying a good stock -- a business with a durable competitive advantage and a large market opportunity -- investors must commit to holding that stock through thick and thin, provided their investment thesis remains intact.
Why? No one knows the future, so attempting to time the market is tantamount to gambling. Countless variables can affect a stock's price in the short term, some of which are unrelated to the stock, but the financial performance of the underlying business is the only variable that matters in the long run. In other words, a long-term mindset eliminates the short-term noise. That means investors who correctly identify good stocks and stick with them are bound to benefit.
Of course, it is easy to be a long-term investor when stock prices are rising, but it takes more discipline when prices are falling. That's why investors should consider this insight from Buffett when they are tempted to stray from a buy-and-hold strategy: "The stock market is designed to transfer money from the active to the patient."
"This material is provided for general information and is subject to change without notice. Every effort has been made to compile this material from reliable sources however no warranty can be made as to its accuracy or completeness. The information does not represent, warrant or imply that services, strategies or methods of analysis offered can or will predict future results, identify market tops or bottoms or insulate investors from losses. Past performance is not a guarantee of future results. Investors should always consult their financial advisor before acting on any information contained in this newsletter. The information provided is for illustrative purposes only. The opinions expressed are those of the author(s) and not necessarily those of Geneos Wealth Management, Inc."