Warren Buffett’s 4 Golden Rules for Making Money During a Bear Market in the Stock Market.
A proven strategy over 12 Bear Markets.
Warren Buffett, 91, has been involved in the stock market for over 80 years now. The man who became the Oracle of Omaha started investing in the early 1940s at the age of 11. At the time, the S&P 500 had just suffered a 35% dip that reached its bottom in 1942. Since then, Warren Buffett has survived more than 12 Bear Markets.
Despite these events, Buffett has always managed to make bigger and bigger profits over the years. For Warren Buffett, the Bear Markets are above all unique opportunities for those who can take a long-term view.
While the S&P 500 is in a Bear Market, and a larger financial crash could occur, Warren Buffett is the one you should listen to take advantage of the opportunity this represents. To that end, here are Warren Buffett's 4 rules for successful investing during a Bear Market.
1. Buy quality merchandise on sale
“Whether we're talking about socks or stocks, I like buying quality merchandise when it is marked down.”
Warren Buffett never lets his emotions get the better of him when investing. He always chooses to rely on his sense of logical reasoning. This is how he has been able to achieve such continued success over the decades.
If Warren Buffett believes in a company, but a Bear Market causes that company's stock to fall, Warren Buffett will strengthen his position. This is what he calls “buying quality merchandise on sale”.
Let's take the example of Apple, which represents more than 44% of Berkshire Hathaway's portfolio. Since the beginning of 2022, caught up in the crash of Tech stocks, Apple has lost more than 20% on the stock market. Rather than panic, Warren Buffett is sticking to his philosophy. He will strengthen his position in Apple because he fundamentally believes in Apple.
If he was ready to buy Apple shares before this crash, then he is even more convinced that he should do so after this fall, which will only be temporary. Because Warren Buffett understands that the stock market is cyclical, just like the economy.
2. Be ready to hold a stock forever
“Our favorite holding period is forever.”
Warren Buffett has complete confidence in his judgment based on his logical reasoning and his exchanges with his eternal partner Charlie Munger. When Warren Buffett invests in a company, he is ready to “hodl forever”. He has learned over time that patience is the key to making big profits in the stock market.
With a long-term view, he doesn't get stressed when the market goes into a Bear Market. Warren Buffett has seen it all before and knows it will pass. Your job is simply to wait and profit from the mistakes of others:
“The stock market is a device for transferring money from the impatient to the patient.”
3. Stay calm in any situation
“The most important quality for an investor is temperament, not intellect.”
Investors are familiar with Warren Buffett's golden rule of being prepared to “hodl forever”. However, many find it difficult to apply it when panic takes hold of the market. This is the case during a Bear Market. It is in this type of situation more than any other that you need to stay calm.
A good example of a time when you need to keep a cool head. Let's say you buy the stock of a company you fundamentally believe in when the market crashes. The market may go even lower. However, you must remain calm and understand that your investment was for the long term.
Don't panic, and get back to a long-term view. That's how you'll be among the winners of a Bear Market like Warren Buffett.
4. Don't follow the markets too closely daily
While many investors understand the importance of taking a long-term view to fully benefit from the stock market, too many continue to follow the markets too closely daily. This can lead them to act counterproductively by letting their emotions take over.
When asked for his best advice during a Bear Market, this is what Warren Buffett consistently says:
“Buy, hold, and don't watch the market too closely.”
Bear Markets are temporary as history has always taught Warren Buffett. If you are investing in the fundamentals of a company, there is no point in following them too closely daily. Trust your choices and stick to the position of someone willing to hold a stock forever.
This will allow you to enjoy your investments while being much less stressed.
Final Thoughts
Warren Buffett's 4 rules in a Bear Market have allowed him to always succeed in taking advantage of what presents an opportunity for him. You will notice that in a Bear Market, Warren Buffett does not sell in panic mode. His only two options are: buy or hodl.
If you are wondering about the relevance of Warren Buffett's philosophy in a Bear Market, I think you should take a look at Berkshire Hathaway's performance in the stock market over the last few decades. That should convince you if you still need it.
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