Warren Buffett Has This Advice in the Event of a Financial Crisis

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When everyone else is falling apart, it’s time to be brave.

Key points

  • When high demand is driving the price of stock upward, step back and evaluate the situation.
  • When the market gets nervous and sells off, it’s time to buy.
  • Successful investors learn to live with the ups and downs in the market.

Warren Buffett has said this of the stock market: “Be fearful when others are greedy and greedy when others are fearful.” Time and again, Buffett’s advice has paid off for the so-called Oracle of Omaha. Here’s how it can benefit you the next time a financial crisis hits.

Ignore the noise

Not every drop in the market is worthy of the title “crisis.” The first stock exchange opened in the U.S. in 1790, and since that time, there’s been some level of hand-wringing each time the market has dipped. When the market is performing well, it’s called a bull market. When it’s practically asleep, it’s a bear market. To give you a better idea of how common bull and bear markets are, consider the following:

  • Bear markets are not reason for panic. In the S&P 500 index, there have been 26 bear markets since 1928 (an average of one every 3.6 years). For reference, there have also been 27 bull markets. Over the long term, stock values have risen significantly.
  • On average, stocks lose 36% of their value during a bear market. However, stocks gain an average of 114% during a bull market.
  • Despite emotionally-driven panic, a bear market does not necessarily mean we’re in an economic recession. Since 1929, there have been 26 bear markets, but only 15 of those led to recessions. While recessions are never easy, they’re also a time of opportunity for a smart investor.
  • Let’s say you spend 50 years of your life investing. You could live through approximately 14 bear markets. While it may be painful to watch your portfolio dip, downturns are a temporary part of the economic cycle.

Buffett’s advice is to ignore those who are sure the end is near every time their portfolios take a hit. It’s not only hysterical behavior, but it robs them of the opportunity to use a bear market to their advantage.

Buy at a bargain price

Imagine the next new “big thing.” Perhaps it’s a hybrid vehicle that runs more than 100 miles on a single gallon of gas, or a brilliant new medical device. The company goes public and everyone wants a piece of the action.

It seems like everyone you know is buying and the stock price soars. All your friends picture themselves making millions and you’re starting to feel left out. According to Buffett, this is when you should be wary.

The reasoning is this: You don’t know if the stock is performing well because the company is legitimately groundbreaking or if the stock is performing well because everyone and their brother has jumped on the bandwagon.

Now, if you’ve done your research and believe there’s a legitimate reason to hitch your wagon to this company, the time to buy is when others become fearful, call their broker to sell, and you can scoop up shares at a reduced price.

Keep your eye off the ball

As mentioned, the market will rise and fall regularly throughout your lifetime. Watching it like a hawk and selling any time your portfolio takes a hit may feel like the right thing to do, but it’s unlikely to benefit your long-term goals. That’s because you still want to be holding that asset when values begin to rise.

As Warren Buffett has said, “If you aren’t willing to own a stock for 10 years, don’t even think about owning it for 10 minutes.”

Do your homework before purchasing any asset, buy it, and leave it alone to suffer through bear markets and soar through bull markets. When everyone else is selling off, remind yourself that what goes down, frequently goes way, way up.

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