There is a simple reason why stocks are the best investment for long-term growth. Historically, the market has gone up over the long-term. No matter how sharp the crash or how deep the recession is, sooner or later, the market recovers – and it typically goes on to achieve new heights before the cycle repeats all over again.
Warren Buffett, net worth $106 billion, is widely considered one of the world’s most successful investors. He has been buying stocks for more than 80 years, and he has experienced more than a dozen bull-bear cycles.
In 1973, Buffett was seven years into running his holding company, Berkshire Hathaway, when the market dropped 50 percent. There was no long-term impact to his portfolio. Buffett also survived the dot-com bust of the early 2000s, and he brought his company through the 2008 – 2009 global financial crisis safely.
When the market crashed in 2020, Berkshire Hathaway stock fell along with most other companies, but Buffett didn’t panic. Instead, he prepared for the next bull market using the investment strategies he had perfected over eight decades.
The most recent bear market became official in June 2022, but Buffett wasn’t alarmed. He reassured Berkshire Hathaway investors that this, too, shall pass. Throughout the current economic crisis, he has been busy keeping the company’s portfolio on track for long-term growth.
Buffett is primed for the next bull market, and he is confident that when it comes, Berkshire Hathaway will be well-positioned to take advantage of that growth.
Warren Buffett Quote #1: If you aren’t willing to own a stock for 10 years, don’t even think about owning it for 10 minutes.
There are two critical concepts wrapped up in this single Warren Buffett quote. First, every investment should be made with an eye on long-term goals. Second, ignore the meme stocks and take a hard pass on the trendy companies getting a lot of press. That sort of popularity is fleeting. When the hype fades, the price of these overvalued shares will come crashing down.
Instead, choose companies that demonstrate their ability to grow in value over time. The ones with a history of maneuvering through tricky economic conditions successfully. These companies are financially prepared for market ups and downs, they have the resources to survive an internal or external crisis without overreliance on debt, and they are well-managed by capable, experienced leaders.
Warren Buffett companies have a wide, sustainable moat that cannot be easily overcome by would-be competitors. Sometimes, that means a world-class brand, other times, it’s a unique product or exclusive patent. In many cases, it is a combination of multiple factors that create a commanding presence in the market.
Examples of Warren Buffett stocks that meet his criteria for wide moats, financial stability, and effective leadership include Amazon, Apple, MercadoLibre, Microsoft, and Visa.
Warren Buffett Quote #2: Derivatives are financial weapons of mass destruction.
Berkshire Hathaway’s stock portfolio spans multiple industries, and its collection of subsidiaries expands its reach even further. The company owns restaurants, insurers, realtors, clothing manufacturers, and railroads, among others. What’s interesting is that despite its massive size and extensive holdings, there is one type of asset that is frowned upon at Berkshire Hathaway: derivatives.
Unlike most companies of its size and scope, Berkshire Hathaway doesn’t speculate much with derivatives. These tools are typically used to increase leverage, hedge a position, or bet on how an underlying asset will move within a given timeframe.
However, Buffett has repeatedly pointed out that such products make it possible to create massive, insurmountable debt that can wipe out entire funds, companies, and, ultimately investors. Buffett said in his 2002 letter to shareholders, “Derivatives are financial weapons of mass destruction.”
Though he knows a bull market is coming, Buffett isn’t putting investors’ money into derivatives. He knows that trying to guess exactly when and how much a security will go up is unwise. Instead, he is investing in reliable companies that have the sort of solid foundation that ensures they will increase in value over time.
Warren Buffett Quote #3: The stock market is designed to transfer money from the active to the patient.
Buffett doesn’t worry about short-term market conditions. His focus is always long-term, partly because the market has consistently increased in value over time. But that’s not the only consideration.
Buffett has been watching market behavior for many years, and along the way, he has had an opportunity to observe the effectiveness of many investment strategies. He has learned that reacting to short-term movements and temporary events doesn’t deliver the reliable returns that come with patient, thoughtful trades.
Too many investors jump on the bandwagon when a particular stock becomes popular, and they buy shares priced far higher than their intrinsic value. When the price inevitably drops, they lose significant sums.
Conversely, it is quite common for a single setback to alarm investors, prompting them to sell shares in an otherwise stable, reliable company. They intend to avoid large losses, but the result is a missed opportunity. When the stock recovers, they are too late to benefit.
Warren Buffett’s investment strategy is about quality over quantity. Active trading isn’t part of his routine. He carefully considers each move before executing, and then he holds his positions long-term – or until it becomes clear that a company can’t recover from a substantial downturn.
When the current bear market moves back into bull market territory, the Berkshire Hathaway stock portfolio will be intact so that it will grow as those stocks recover their value.
Warren Buffett Quote #4: Widespread fear is your friend as an investor because it serves up bargain purchases.
Warren Buffett doesn’t suspend trading during tough economic times. In fact, he considers it the best time to buy. When stocks are down, he prepares for the next bull market by purchasing quality companies at bargain prices.
In other words, Buffett doesn’t give into the fear that comes with a falling market, and he ignores doomsday predictions of an impending recession. He has confidence in American ingenuity – what he calls “The American Tailwind” – and he is comfortable putting money into quality stocks that he believes can deliver long-term profit.
The bottom line is that bear markets aren’t necessarily bad from an investment perspective. With the right strategy, it can be an opportunity to buy high-quality shares at unusually low prices. When the market recovers, as it always has in the past, investors who mirror Buffett’s methods will enjoy outsized profits.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.