It's generally agreed that investing in the best companies you can find and holding on for the duration is the best way to generate long-term wealth. Yet 2022 has been a year like no other, marked by ongoing COVID-19 scares globally, rampant inflation, soaring interest rates, a bear market, and an "is it or isn't it" recession. How can now possibly be a good time to invest?
If this financial cloud has a silver lining, it's this: Each and every bear market the financial world has ever known has eventually rebounded, giving way to a bull market. This means that while the current downturn is certainly nerve-racking, it will eventually turn, rewarding investors who stayed the course.
But don't take my word for it. Renowned Berkshire Hathaway CEO Warren Buffett has addressed the situation and even seasoned investors can still learn a thing or two from the Oracle of Omaha. In short, Buffett argues now is the time to invest.
Image source: The Motley Fool.
Setting the stage
Buffett generally doesn't mince words and when discussing economic headwinds:
"The financial world is a mess ... its problems, moreover, have been leaking into the general economy, and the leaks are now turning into a gusher," he wrote once. "In the near term, unemployment will rise, business activity will falter, and headlines will continue to be scary."
While this aptly describes the current situation, you might be surprised to learn that Buffett penned this at the height of the Great Recession in October 2008, in an opinion piece published in The New York Times.
Of course, Buffett had no way of knowing that the market would bottom just months later, giving way to the longest bull market in history, which lasted nearly 11 years.
Data by YCharts
But that makes what he had to say all the more relevant, as one simply has no idea how long the current downturn will last. Buffett went on to say (emphasis mine):
Let me be clear on one point: I can't predict the short-term movements of the stock market. I haven't the faintest idea as to whether stocks will be higher or lower a month or a year from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over.
Put another way, Buffett is pointing out that the stock market will likely begin to rebound well before the downturn is over -- and history shows that Buffett hit the nail on the head. The market -- as represented by the S&P 500 -- bottomed on March 9, 2009, though the Great Recession didn't officially end until June.
Why is now the time to buy?
While it might seem counterintuitive, the time to buy stocks is when everything is going to hell in a handbasket. Buffett talked in that same 2008 article about how during the 20th century -- during a period of unprecedented stock market gains -- some investors actually managed to lose money, saying, "The hapless ones bought stocks only when they felt comfort in doing so and then proceeded to sell when the headlines made them queasy."
I don't know about you, but current market conditions certainly make me a little queasy -- even downright nauseous sometimes -- which Buffett suggests is the best time to buy. Investors might be more familiar with another Buffett quote on the matter: "Be fearful when others are greedy, and be greedy when others are fearful."
It seems like 2022 has been one bit of bad news after another. According to Buffett, again from his perspective back in 2008, that's a good thing: "In short, bad news is an investor's best friend. It lets you buy a slice of America's future at a marked-down price," he wrote. This suggests that a period of unrelenting bad news -- like investors have experienced over the past 12 months -- is actually the best time to buy stocks.
Furthermore, many investors have moved to the sidelines and are holding cash, exactly when they should be investing. "Today people who hold cash equivalents feel comfortable. They shouldn't," Buffett wrote in the 2008 New York Times article. "Equities will almost certainly outperform cash over the next decade, probably by a substantial degree. ... In waiting for the comfort of good news, they are ignoring Wayne Gretzky's advice: 'I skate to where the puck is going to be, not to where it has been.'"
Simple doesn't mean easy
To be a successful investor most often means adopting a long-term outlook. Note that Buffett said stocks will outperform cash "over the next decade." That didn't mean the market couldn't go lower over periods of weeks or months.
That's just as true now as it was then. Markets could fall in the short-term. Furthermore, not everyone is in a position it invest their hard-earned cash, particularly those without an emergency fund, or those struggling to pay for the essentials like food and gas.
That said, market sentiment can turn on a dime, and history suggests this will happen long before the downturn is over. Furthermore, many stocks are cheaper than they've been in some time. That's why right now is the best time to invest in the stock market.
