The Stock Market Is Sending a Rare Warning. Here’s Warren Buffett’s Best Bear Market Advice.

Warren Buffett, the former CEO of Berkshire Hathaway (BRKA +0.47%)(BRKB +0.53%), was best known for his stock-picking acumen. He was such a successful investor that he earned the nickname The Oracle of Omaha. While investors paid close attention to the stocks Buffett bought, they probably didn’t focus enough on what he did after buying them. And he followed the same approach through both bull and bear markets.

As the market flashes a valuation warning sign, with the Shiller CAPE Ratio at levels last seen before major market downturns, now is the time to revisit Buffett’s not-so-hidden long-term secret. After buying a stock, he would hold it for the long term to benefit from the company’s long-term growth. Here’s why that’s so important to remember today.

Buffett’s three investment steps

You can simplify Warren Buffett’s investment approach into three specific steps. First, find well-run businesses. Second, only buy those businesses when they are reasonably priced. Third, hold for the long term to benefit from the company’s growth. The first two steps are far more exciting than the third, which can be as boring as watching paint dry or grass grow.

However, it is the most boring step that is likely to have the biggest impact on your long-term returns. And you don’t have to look any further than the S&P 500 index (^GSPC -0.40%) to prove it. As the chart below highlights, even if you bought the S&P 500 just before a bear market started, you’d still end up growing your wealth over the long term if you just continued to hold it.

^SPX data by YCharts

Some of the biggest bear markets and worst recessions in history look like nothing more than blips today. Even if you had terrible timing, history suggests that the steady growth of the index would make up for that mistake if you just avoided selling out of fear.

Having the fortitude to hold for the long term is important today

Holding for the long term could be the most important Buffett advice today because the market looks expensive. The Shiller CAPE Ratio, which is the S&P 500’s price divided by the 10-year moving average of inflation-adjusted earnings of its constituent stocks, is near the elevated levels prior to the dot-com crash. And today’s Shiller CAPE Ratio is above the levels reached before the Great Depression. A bear market wouldn’t be all that shocking at this point.

Shiller CAPE Ratio data by YCharts

To be fair, Buffett often used bear markets to buy attractively priced stocks. So, if there is a bear market, you shouldn’t stick your head in the sand and do nothing. But selling out of fear isn’t what Buffett would recommend, particularly if you have taken the time to build a portfolio filled with well-run companies. If anything, a market downturn could be a good time to add to your positions.

Emotions are hard to control

The problem is that emotions are powerful, and fear is one of the strongest. It is hard to explain how difficult it is to watch your wealth slip away day after day to someone who has never experienced a deep, prolonged bear market. The emotional duress can cause actual physical pain, from sleepless nights to gut-churning agitation. It is why now, before the bear arrives, is the time to steel your resolve. To prepare to hold your ground. To prepare to buy when others are selling.

The elevated Shiller CAPE Ratio is the warning sign. Buffett’s investment advice to buy good companies while they are attractively priced and then, most importantly, hold for the long term is the foundation that can help you survive if that warning sign proves prescient again.