After two years of soaring returns, the investing tide has turned... at least for the moment. The S&P 500 and the Nasdaq, after shifting in and out of correction territory, just completed their worst quarter since 2022. And in one trading session this past week, both indexes fell the most since 2020. The reason behind the turmoil? Investors are worried that President Donald Trump's tariffs on imports will damage corporate earnings as the prices of goods rise and consumers' ability to purchase them diminishes. Economists even have suggested that a recession may be next.
All of this is enough to shake any investor's confidence. But before you decide to exit the stock market -- or completely stay away -- how about considering some advice from investing giant Warren Buffett? His holding and investment company Berkshire Hathaway has more than $267 billion invested in stocks. And over 59 years -- which have included plenty of tough times from market crashes to recessions -- Buffett has beaten the market.
Should you really buy stocks now, with indexes plummeting and the impact of tariffs looming? The Oracle of Omaha has the answer.
Image source: The Motley Fool.
Buffett predicts what's ahead
Buffett earned his nickname for his ability to successfully identify solid companies and understand which ones may win over time and how the overall market may behave over the long term too. The "Omaha" part refers to where Buffett was born and still lives today.
The top investor is known for his independent thinking, his habit of going against current trends, and his calm attitude about the market -- whether stocks are soaring or tumbling. Buffett focuses on quality companies with strong competitive advantages, and he aims to buy shares of such players at reasonable prices. This last part is key. No matter how fantastic a company is, Buffett won't pay any price to get in. And that's why, when markets are soaring, he doesn't hop on the bandwagon and pay top dollar for the hottest stocks of the day.
In fact, as the market climbs, Buffett often is a net seller of stocks as he was last year. Berkshire Hathaway even reduced positions in favorite holdings, including Apple and Bank of America, and built up a record cash pile. So, though many investors get excited about investing when the market climbs, Buffett doesn't.
Investors' Cinderella-like behavior
In his 2000 shareholder letter, the billionaire talked about the days leading up to the bursting of the tech bubble. He compared investors to Cinderella at the ball. "
They know that overstaying the festivities -- that is, continuing to speculate in companies that have gigantic valuations relative to the cash they are likely to generate in the future -- will eventually bring on pumpkins and mice. But they nevertheless hate to miss a single minute of what is one helluva party.
Buffett didn't stay late at that party or others that have followed. This brings me to his words on investing at a time like now when indexes are down, and it's not clear when they'll recover and post lasting gains. It may seem scary to invest right now, and the market may not look at all inviting, but this is actually the ideal time to invest, according to the investing giant.
"Berkshire and its long-term shareholders benefit from a sinking stock market much as a regular purchaser of food benefits from declining food prices," Buffett wrote in his 2000 annual report. "So when the market plummets -- as it will from time to time -- neither panic nor mourn."
Something investors often get wrong
Buffett puts this in another way in his 1997 letter to shareholders. "If you expect to be a net saver during the next five years, should you hope for a higher or lower stock market during that period?" Buffett wrote.
Many investors get this one wrong. Even though they are going to be net buyers of stocks for many years to come, they are elated when stock prices rise and depressed when they fall. This reaction makes no sense. Only those who will be sellers of equities in the near future should be happy at seeing stocks rise.
The idea here is clear: Now, during times of turmoil, you can pick up quality stocks for dirt cheap prices. Though these companies may see earnings soften in the near term, their long-term potential hasn't changed. They still have what it takes to deliver growth in the years to come. So, before buying a stock consider this: Even if the tariffs hurt earnings over the coming year or so, does this company still have the ability to generate solid growth in five or 10 years? In many cases, the answer will be "yes."
And since it's impossible to know when a stock's rebound will start, the best idea is to buy it when the price looks right and shift your focus to the long term.
Of course, it's always a little unsettling to look at your portfolio during tough times, but if you remember Warren Buffett's words, it should make the experience easier and inspire you to make investing moves you won't regret a few years down the road.
