Warren Buffett says this type of investor benefits most when stock prices go down

Warren Buffett has a different view of most stock market declines, and it’s hard not to think he’s right. After all, Buffett is among the world’s richest billionaires and most successful investors. Clearly, his view of market cycles has served him well.

Here’s a look at what Buffett has to say about falling stock prices, and how you can safely implement his tactics.

net stock buyer

In a 2020 interview with CNBC, Buffett said that “net buyers” of stocks benefit when the stock market is down. By “net buyers,” he means investors who are buying more shares than selling.

And imagine what? You are likely a net buyer. Anyone who invests monthly in a retirement account can be a net buyer. Buy and hold investors are usually net buyers.

Image source: Getty Images.

For net buyers, lower stock prices can mean the potential for bigger gains, assuming you continue investing when the market goes down. In Buffett’s view, net buyers should celebrate lower markets — the same way you might benefit from lower food or gas prices.

I think it’s this way. If you invest regularly and sell infrequently, it makes sense to focus on stock prices as they relate to buying rather than selling. And for buyers, lower stock prices are a good thing.

How Buffett celebrates falling stock prices

Buffett puts that perspective into practice, too. When the stock market turns, it often increases its buying activity – taking advantage of lower stock prices before they are gone.

This is exactly what happened in the first half of 2022, when it was Standard & Poor’s 500 It decreased by about 20%. Berkshire HathawayBuffett, the conglomerate, invested nearly $44 billion in net sales during the decline.

When the market finally recovers, the company stands to record some nice gains on those purchases.

How to invest safely in downturns

Investing in lower markets can increase your portfolio’s earning potential in the long run – but it’s not for everyone. It’s clear that Buffett has unparalleled resources as well as decades of experience at his side. For the rest of us, buying during a downturn can be stressful.

For this reason, it is smart to proceed conservatively. These guidelines will help:

  1. Don’t invest the money you’ll need to spend in the next five years. Even better, give your investments 10 or 20 years to accumulate gains.
  2. Buy companies you know. Do not use this time to speculate. Instead, rely on mature companies with a proven ability to undermine economies and other crises. You can also invest in large-cap ETFs in order to diversify on a budget.
  3. Invest a small amount every week or month. Periodic small investments have less timing risk than a large one. Timing risk is the chance that a stock’s price will drop dramatically 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 up your life savings for years.

Embrace the buyer’s gaze

Even if you choose not to increase your investment activity in this challenging market, you may try to experiment with a net buyer outlook.

Instead of focusing on how much your portfolio will depreciate, look for an opportunity. Watch how your favorite stocks respond, and imagine how you will succeed in the recovery. You can even keep track of the simulated wallet on paper.

The exercise should make this market more emotionally tolerable. By the time the next bear market starts, you will have a strategy to work from – just as Buffett will.

Katherine Brooke has no position in any of the mentioned stocks. Motley Fool has and recommends positions in Berkshire Hathaway (B stock). Motley Fool recommends the following options: long January 2023 calls of $200 on Berkshire Hathaway (B shares), short January 2023 calls of $200 on Berkshire Hathaway (B shares), and short January 2023 calls of $265 on Berkshire Hathaway (B shares) ). Motley Fool has a disclosure policy.

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