20 Tips From Warren Buffett on Weathering a Market Downturn

There's investing legends and then there's Warren Buffett, a man who earned the nickname "The Oracle of Omaha" because of his incredible and long lasting investment success. To suggest that Buffett has lived through a lot of different markets in his day would be an understatement. But his wisdom pulls from an even deeper reservoir, because of the iconic men who helped mold his investment approach. That list notably includes famed value investor Benjamin Graham, largely considered the father of securities analysis, and growth-oriented investor Phillip Fisher, who penned the iconic investing guide Common Stocks and Uncommon Profits (which has been in print for more than 50 years!).

Roll it all up and Buffett has a lot of wisdom to share. Which he is happy to do, as it were, in his company's widely ready annual reports. But you don't need to search through each and every one of Berkshire Hathaway's (NYSE: BRK.A) (NYSE: BRK.B) CEO letters to figure out what to do when times get tough on Wall Street. We've picked 20 of the best quotes for you. Here they are and some things to contemplate about each one.

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Sorry to break it to you but the current bear market in stocks isn't really the biggest problem you face -- you are. As Buffett has noted, "Success in investing doesn't correlate with IQ ... what you need is the temperament to control the urges that get other people into trouble in investing." The second half of that sentence is, perhaps, the most important thing you will ever be told about investing.

Markets go up and markets go down, it is how you react that will make the difference over the long term. Right now, stop everything you are doing and recognize how the market plunge makes you feel. Only after you have done that can you consider if what you are doing or planning to do is a rational reaction or not. And even then, you still need to look at your choices in relation to the normal human biases and mistakes to which we are all highly prone. Buffett's simple quote on this one opens up a deep, and perhaps troubling, reservoir of work investors need to take on, but often avoid. Instead of making big portfolio shifts during these turbulent times, consider looking inward and learning more about yourself.

The second quote from Warren Buffett is in the same behavioral finance realm as the first, but far more specific: "There is nothing wrong with a 'know nothing' investor who realizes it. The problem is when you are a 'know nothing' investor but you think you know something."

This quote actually speaks to a common bias for humans to be a little too confident in their abilities. To be fair, being confident in and of itself isn't a bad thing. However, if you are so confident that you can't see your own faults, then you have a problem. Assuming you are a human being, you make mistakes and it's okay (it's how we learn). Recognize this fact and consider your choices carefully, particularly when you are under stress (like periods of time when markets are volatile). There's no harm in admitting, even if it is only to yourself, that maybe you need to step back and take another look at something, perhaps seeking outside help from a true expert, before pulling the trigger.

As if on cue, Buffett's folksy wisdom provides us another valuable nugget to follow: "Never invest in a business you cannot understand." Sounds silly, but it really isn't.

There are a lot of stocks in the world and each one has a different story behind it. Every industry comes with its own set of nuances. And each country involves a unique set of factors that change the risk/reward equation in sometimes surprising ways. There is no way for you to be an expert on everything (see Buffett quote number two if you think that you are the one person who can), so instead of trying to do too much, focus down on your strengths and stick with them. If there's something you don't understand, move on. It's not worth the risk of making a mistake because you didn't know that you didn't know some vital nuance of an investment. The risk of trying to do too much only gets amplified when markets are plunging because stress will cloud your thinking. That said, if you find yourself with an investment in a company that you clearly didn't know well enough when you bought it, strongly consider selling it if you aren't willing to dig in deeper.

If you read quote three and felt a little uneasy because limiting your investment sphere might mean missing out on a great investment opportunity, don't. Buffett has some advice to offer: "The stock market is a no-called-strike game. You don't have to swing at everything -- you can wait for your pitch."

Markets rise and markets fall, and there's a whole lot that goes on in between. Sectors go in and out of favor. Companies thrive and falter. There is an immense amount of "stuff" going on in the market every single day, even when the market isn't falling hard and fast. It's like a soap opera for people who like money more than television dramas -- even more so in a bear market. But just because things are always happening doesn't mean you need to do something about any of it. You can simply watch and wait for the right investment to come your way (see quote three for some extra guidance on what that means). Then, and only then, should you take a swing. It might take a while for the right pitch (investment) to come along, but there's no umpire watching over this game calling balls and strikes. So feel free to take all the time you need.

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Buffett is so adamant that investors don't try to do too much, that he has an even more specific quote on the issue: "An investor should act as though he had a lifetime decision card with just twenty punches on it."

It is hard to imagine any investor only making 20 investments in a lifetime. That's doubly true if he or she actually enjoys the act of investing. (Yes, for some people -- perhaps you -- digging through quarterly and annual reports is fun!) So don't take this quote too literally. But don't ignore it, either. You don't get bonus points for having bought 1,000 different investments or trading multiple times a day. What matters at the end of it all is whether or not you make money. With that in mind, you should be extra careful to ensure that what you are buying (or maybe selling short) is really worth it. "Worth it" is a bit open ended, but purposely so. That could mean worth your time to learn about and track or, more directly, worth the investment of your money. You are human and have limited resources, don't squander them by being overactive when a slower, more deliberate approach would likely prove equally fruitful, if not more so.

Buffett rarely, if ever, gives specific investment advice, such as "buy XYZ stock." He's more subtle than that and his quotes take a big picture view. Which is the case with this little ditty, which is really Buffett channeling Benjamin Graham: "Price is what you pay. Value is what you get."

A stock price is just a number and it may or may not be a good representation of the value of the underlying company. In fact, if you watch the market for any length of time, you'll soon come to realize that price is, at best, an approximation. At worst a price can be totally unrealistic, to the high or low side. Graham had a fun little story about Mr. Market that gets to the heart of the matter. Mr. Market is your partner in a business. Some days he's super happy and willing to pay a huge amount of money to buy you out. Some days he's super sad and willing to sell you his half of the business for pennies. As an investor, your job is to take advantage of Mr. Market's moods to make money. It's a fun way to think about a very serious topic. And the moral of the story is that you shouldn't get too caught up in the price of a stock, it's unlikely to represent the true value of the asset at any given time. In fact, when the Market is cratering, price is increasingly unlikely to be a good yardstick to monitor.

We'll get into some of Buffett's big picture advice for picking stocks in a little bit, but following up on the price versus value conundrum are these sage words: "You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right."

So price and value are different things. That means that you could own a great company and its price could still materially decline. Does that mean your investment decision was wrong? Not necessarily. Mr. Market's mood swings might have simply changed what he's willing to pay you for the company at the moment. So work to ensure that when you take a swing (buy a stock -- see quote four) that you really understand and believe in the company you are buying. Buffett, as it were, has owned some stocks for decades -- including through their good and bad days -- because the reason he bought is sound and still intact. When markets are falling hard and fast, it's easy to feel like you've made a mistake. Don't assume that's the case, go back to your original logic and assess the business from the ground up. You might decide that nothing has changed but the market's current view. In which case, your reasoning is probably still spot on.

So how do you know if you are buying a company that's worth sticking with through the inevitable good and bad times ahead of it? There's no good answer, sadly, but Buffett does have some great advice to offer: "If you aren't willing to own a stock for 10 years, don't even think about owning it for 10 minutes."

Buffett often talks about buying stocks that he would want to own even if the stock market were to shut down for a decade. The point is that he's found a company that he believes has long-term appeal, which is what you should probably be looking for, too. If you are looking at a stock and thinking it'll go up over the next few months and then you can make a quick profit, you definitely aren't thinking long-term. At the first sign of adversity, like a bear market, you are likely to sell (and perhaps at a loss). If, on the other hand, you see a long growth trajectory ahead for a company, then some near-term price gyrations won't be that upsetting. In other words, you'll be willing to stick it out for 10 years. It's a mindset shift that can make a big difference to your long-term wealth.

So the Oracle just provided some advice on what to buy, what about what not to buy? The investments we reject don't often get much play, being that they are actions not taken. But saying no is every bit as important as saying yes, with Buffett noting that, "After 25 years of buying and supervising a great variety of businesses, Charlie and I have not learned how to solve difficult business problems. What we have learned is to avoid them."

Give that a second to sink in... It's keeping with the last few quotes, but a lot more specific. Buffett isn't always looking for the good in a stock story, he's also looking for the bad. And if the bad is troubling enough, he has learned to not bother getting involved. Companies get themselves into trouble in all kinds of ways, but one tool you might find helpful is a list created by Bruce Berkowitz of Fairholme Fund. There are just seven items on this list, so it's easy to use. But each one is a key indicator of trouble, including things like too much leverage, not enough cash flow, aggressive acquisition runs, and reaching beyond core competencies. Sometimes not doing something (choosing not to buy a stock) is every bit as important as doing something (buying a stock).

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One of Mr. Buffett's most famous quotes is probably one of his funniest: "Only when the tide goes out do you discover who's been swimming naked."

When the markets are heading higher, driven by irrational exuberance or the madness of crowds, it is easy to feel like a genius. In fact, almost everything in the market might be going up, so being selective (and choosing what not to buy), might look like a dumb approach. But when the bear comes roaring back, as he always has so far, you quickly realize which investments were a mistake. The companies, and investors, that overreached suddenly have to pay the piper. Skinny dipping at high tide may seem fun, but when the tide goes out you may feel a little too exposed. But you need to realize that before low tide or you may find that you're the one who's swimming naked.

If you have followed Buffett's advice on avoiding bad companies, and recognize that downturns help bring problems to light, then his next quote will probably seem obvious: "All there is to investing is picking good stocks at good times and staying with them as long as they remain good companies." Well, if that's all there is to it!

This isn't meant to make light of investing or Buffett's quote. The truth is, it's quite hard to pick good stocks at good times and (if you remember point number one and seven) staying with them. But, and this is important, for most investors this really should be the goal. The key takeaway here is that investors aren't looking for quick gains or actively buying and selling stocks all day long. That's what speculators do. Investors think long term (see number eight), understand what they own, and stand by their investments when the market isn't appreciating their value. It's a mindset difference that you need to understand and commit to if you want to think and invest like Buffett.

If you've gotten the speculative bug out of your system (not an easy task), then Buffett has some more specific advice on selecting stocks: "Buy companies with strong histories of profitability and with a dominant business franchise."

Take Buffett's investment in Apple (Nasdaq: AAPL) as an example, though there are plenty of others to consider. Although this technology giant has had its fair share of difficulties, it has for a very long time been the leading brand name in the cell phone space. It is using that strength to spread into other areas, like service and subscription services. This is possible because once a customer has joined the Apple family, he or she is likely to be a committed fan for life. On top of this, Apple's sticky customers allow it to generate huge amounts of cash that can be put to work on new investment opportunities. When not being put to work, that cash provides a cushion to the business during downturns. Stocks like Apple don't come around all the time and they are often expensive, so you may have to find a company you like and then wait for an opportunity to buy it. But the point of the quote is that you shouldn't go down the quality scale just so you can put money to work.

The next quote we're going to read into a little bit more than Buffett probably intended. But during a downturn an over application of the quote will make a lot of sense... "Cash ... is to a business as oxygen is to an individual: never thought about when it is present, the only thing in mind when it is absent"

Note that one of Apple's strengths is that it generates more cash than it uses. That gives it the ability to use that cash for other purposes, including to limit the impact of business downturns. Going into a recession from a position of financial strength makes a huge difference. You should look for companies that have and or generate plenty of cash. But take that one step further -- what about you? If you are spending more than you earn you are burning cash. And if you don't have an adequate cash cushion in the bank, you are open to financial pain when things inevitably go against you. With regard to investing, if you don't have some free capital in your brokerage account you may not be able to take advantage of bear markets to pick up great companies on the cheap. Never forget that cash is the oxygen of business life.

Most kids are told to share and to think about the wants and needs of others. That's good on an interpersonal level, but the stock market operates differently. And there is definitely a time when you should start thinking only about yourself, if you can. According to Buffett: "We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful."

This is a huge statement and it is very hard for most human beings to really appreciate the magnitude of what Buffett is saying. In times of calm it sounds simple, but when the market or a stock is falling fast and hard, pushing the buy button can be emotionally trying (point number one again). But that's exactly when the best opportunities are likely to be found. To make sure you are ready you need to prepare ahead of time. That means having the cash available to invest and, perhaps, a list of companies that you think are strong, profitable, and dominant (quote 12). Decide ahead of time what you'd like to pay and as long as the story hasn't changed materially, act on that when investors sell the stock off for short-term reasons. You'll need to bite back fear, but you can do it if you have a plan. That helps turn greed into a good thing!

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The COVID-19 virus has created a worldwide panic that's sent the markets broadly lower. That's a great opportunity to buy a range of stocks you might have on your wishlist. But often the opportunities are more surgical, happening one at a time. As Buffett notes with this quote: "The best thing that happens to us is when a great company gets into temporary trouble...We want to buy them when they're on the operating table."

You can't only wait for broad market downturns to buy stocks. They simply don't happen often enough to make that a realistic long-term investment approach. And if you try you'll likely miss a lot of upside in the market. That said, individually, stocks are always going up and down. So you can find good opportunities even in bull markets, if you are willing to look for them and leap when others are shying away. American Express (NYSE: AXP) is a good example when it comes to Buffett. He bought this iconic financial company when it was in the middle of a scandal that had other investors running for the hills. The drop had nothing to do with the broader market, it was unique to AMEX. It's a bigger story, including Buffett taking an active role in running American Express for a little while, but this is just one of many examples where Buffett has stepped in when others wouldn't or couldn't. The key here is to remember that sometimes the opportunities the market offers up happen one at a time, not all at once.

Big market declines and even individual stock drops aren't a constant, especially if you are looking to own good companies (see quote 12). Which is why Buffett suggests: "Opportunities come infrequently. When it rains gold, put out the bucket, not the thimble."

You'll want to take this one with a grain of salt. Clearly you need to make sure you have a diversified portfolio. One good idea could make you rich if it works out as you hope, but it could also send you to the poor house if you are wrong. So you'll want to buy when a good opportunity arises, but Buffett's bucket analogy is probably hyperbole. That said, you'll also want to make sure you're putting enough money to work that it matters. Going back to the Oracle's number of 20 (see quote five) can be helpful. Twenty stocks is roughly enough to get the benefits of diversification, assuming they are all in different industries. So if you use that as a guide, then putting the bucket out means investing around 5% of your overall portfolio when a good opportunity comes along. Keep that in the back of your mind and be prepared when it's raining to use the bucket and not a thimble.

One more time we're going to look at a quote centered around the word cash. This is actually a pretty big clue to how important cash is to investing. But here's the quote, in relation to stock declines: "This does not bother Charlie [Munger] and me. Indeed, we enjoy such price declines if we have funds available to increase our positions."

Yes, Buffett likes to see prices for investments he likes fall because he can buy the shares (or increase his position if he already owns it). That fits with every quote so far. But note that there is a condition... "if we have the funds available." The word funds here for most investors will translate into cash. You really can't take advantage of a great opportunity in the market if you don't have the money to act on it. While it can be hard to let cash sit idle, step back and reframe the story -- the ability to sit on cash is actually a huge advantage over many investment pros. Very often larger investors have mandates to be fully invested at all times. That means putting money into investments they may not like so much and being forced to sell a stock in order to buy another. You don't have to live under that rigid regime. If there's nothing you like, don't bother swinging (quote four) and let the cash sit for a bit. Eventually something will come your way and at that point you can put the cash to work. Note that this may mean putting more money into an existing investment. Until you find a good use, you really won't suffer all that much from carrying a little extra cash.

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Most of Buffett's wisdom is focused on the buy side of the transaction. That makes sense, given his advice to trade infrequently and stick with what you buy for the long term. However, he does have some advice worth considering when it comes to selling stock: "Should you find yourself in a chronically leaking boat, energy devoted to changing vessels is likely to be a more productive than energy devoted to patching leaks."

It's important to recognize that Buffett isn't recommending that you sell a stock because of a bad quarter or two. Chronically here likely means years. But the takeaway is still very important. If things aren't getting better, you might be better off selling a stock and finding another use for the capital. That's as true in a down market as in an up market. In fact, when times are tough, the real weaknesses of a company's business may become even more apparent. If that's the case, you might want to think about getting out. This isn't a suggestion to be a panic seller, but to give your portfolio a serious look. If the tide is out and a company still isn't wearing swim trunks (see quote 10), maybe it really is time to give up on the name.

Just after you've read a quote about selling underperformers, it's time for a big picture one about the long-term positives. According to the Oracle: "For 240 years it's been a terrible mistake to bet against America, and now is no time to start."

The United States of America is a pretty unique place in the world. You can argue if it's better or worse than another country, but for a very long time it has been getting better and better (with some hiccups here and there). A bear market or global recession is no reason to decide that the future is going to see the U.S. suddenly become a worse place. And a big part of the success this country has achieved ties back to its capital markets. So despite the volatility, keep investing for the long term.

There's just one more quote from Buffett to look at on this list... "Among the various propositions offered to you, if you invested in a very low cost index fund -- where you don't put the money in at one time, but average in over 10 years -- you'll do better than 90% of people who start investing at the same time."

Stock investing is hard. It requires a lot of work, including emotional work (there's point number one again), that can be difficult for even the most dedicated souls. It isn't for everyone. If a bear market has you convinced that investing is just too much, that doesn't mean you shouldn't invest at all. There are other perfectly good ways to do it that don't require nearly as much effort. Buffett wisely suggests looking at index funds, which are a great option for more passive investors. Buy an index fund and you'll never beat the market, but you'll never lag behind it either. More important, you'll still be investing in your future financial success.

Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Apple and Berkshire Hathaway (B shares) and recommends the following options: long January 2021 $200 calls on Berkshire Hathaway (B shares), short January 2021 $200 puts on Berkshire Hathaway (B shares), and short June 2020 $205 calls on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.