Last year, as indexes soared, Warren Buffett sent a warning to investors -- not through words but through actions. The billionaire investor at the helm of Berkshire Hathaway was a net seller of stocks and built up a record cash position of $334 billion. He even reduced positions in some of his favorite stocks, including Apple and Bank of America.
Buffett finished the year by closing out positions in two index funds that track the performance of the S&P 500: the Vanguard S&P 500 ETF and SPDR S&P 500 ETF Trust. The unspoken message rang out loud and clear -- declines may be on the way.
Buffett's moves proved wise as indexes crumbled over the past several weeks. Of course, the famous investor didn't have a crystal ball to predict exactly what would happen and when, but Buffett's experience in the market has left him with a good sense of when stocks are becoming expensive or when market excitement may seem too pronounced.
What actually hurt stocks in recent weeks, even pushing the Nasdaq to crash and enter a bear market, was a decision from Washington. President Donald Trump announced a tariff plan on imports from countries around the world, and investors worried about the impact on companies' earnings, the consumer, and economic growth.
Indexes have shifted from losses to gains and back again amid various announcements from the president concerning the tariffs. The S&P 500, the Dow Jones Industrial Average, and the Nasdaq rose on the last trading day of the week on optimism about President Trump's 90-day pause on the biggest duties and the possibility of reaching a tariff agreement with China.
Against this backdrop, what should you do as an investor? Let's consider some Buffett wisdom to guide us.
Image source: The Motley Fool.
Buffett's performance over time
First, you might ask why investors often look to Warren Buffett for advice. It's because the billionaire has proven his knowledge of financial markets over time, even earning the nickname the "Oracle of Omaha." He's helped deliver a compounded annual gain of almost 20% at Berkshire Hathaway over 59 years, compared to a compounded annual gain of about 10% for the S&P 500 over the same period.
Many elements contribute to Buffett's success, but two carry a particularly heavy weight: attention to valuations and commitment to long-term investing. Buffett won't buy an overvalued player because he knows it will be difficult to profit from that investment. Instead, he favors solid companies trading for less than their intrinsic value.
At the same time, he doesn't expect to profit from this investment overnight but rather plans on holding for a number of years. He knows that, eventually, the rest of the market will recognize the true value of this player, and the stock will advance. And this brings us to his words of wisdom that could help you navigate the market amid the turmoil.
"I never attempt to make money on the stock market," Buffett once said. "I buy on the assumption that they could close the market the next day and not reopen it for five years."
Buffett's perspective
This shows that Buffett isn't at all worried about stock performance over a few weeks, quarters, or even a year or two. Instead, he focuses on a company's ability to perform -- in terms of earnings and stock performance -- over a much longer period. That means Buffett doesn't lose faith in stocks during difficult or volatile times because these are temporary moments and are unlikely to destroy a quality company.
This helps us answer our question: What should you do as an investor during today's uncertain times? Like Buffett, investors should focus on a company's long-term prospects. A player with a strong market position, solid earnings growth, and a sound roadmap for the future could represent an excellent buy today. If you already own stocks like this, you may gain by holding on to them rather than selling during a market downturn.
This should ease your mind regarding your current investments. (Meanwhile, with valuations of many stocks at bargain levels, you can seize some fantastic deals, following another piece of valuable advice from Buffett.)
It's always important to invest for the long term, allowing companies the time to develop and deliver growth and your portfolio the time to benefit. But during tough markets, staying calm and looking at each stock you hold or plan to buy through a long-term lens is particularly important.
The strongest of players may tumble today, but market and economic phases evolve, meaning today's difficult market will eventually lead to tomorrow's flourishing one. Remembering this and the wisdom of Warren Buffett should help you make the right decisions and keep cool during the market turmoil -- and beyond.
