There’s a lot to be nervous about right now. Inflation is high. The Fed just raised interest rates for what’s likely to be the first time in a series. The Iran war has raged on for months with no end in sight, and the U.S. government continues to rack up debt at a prolific rate.
Does that mean it’s time to consider selling stocks? Or do you prepare to buy more shares if prices fall?
In Berkshire Hathaway‘s (BRKA -0.24%)(BRKB +0.30%) 1990 shareholder letter, Warren Buffett prefers the latter approach and even takes it one step further. He viewed declines as more than just an opportunity. He actually welcomed them because he felt he could buy quality companies at even better prices, feeding off his original idea that the “stock market is a device for transferring money from the impatient to the patient.”
His broader lesson is simple. If you’re going to be a long-term buyer of stocks, falling prices should be taken advantage of, not feared. The justification? The S&P 500 (^GSPC -0.25%) has fully recovered from every correction and bear market in history.
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Every bear market eventually ends
Over the past 150 years, U.S. stocks have experienced 26 bear markets, or roughly one every six years. The causes of these market declines vary widely. They can be due to soaring inflation, the bursting of a bubble, a deep recession, a pandemic, or some type of geopolitical disturbance.
Regardless of the cause, the outcome has eventually been the same. Stock prices recovered the entirety of their losses and eventually established a new all-time high.
Granted, the time to recover from a bear market can take several years, and it can take patience and discipline to ride out the duration of that recovery. But long-term investors have eventually been rewarded.
This is the gist of Buffett’s argument. If stocks have historically always recovered, pullbacks give you the chance to buy stocks on sale. Buying the dip can actually help enhance your long-term returns.
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The Buffett way of investing
Buffett has reiterated this notion for years. In Berkshire Hathaway‘s 1997 letter to shareholders, he said essentially the same thing when he noted that investors should “rejoice when markets decline.”
Doing that isn’t easy. It essentially requires you to look at bear markets optimistically when the rest of the world is scared. It means you probably need to do the opposite of what everyone else is doing.
The rewards for doing so, however, can be tremendous. I’d keep investing and adding to my equity positions. In addition, reinvest all distributions and become even more aggressive the further that stock prices fall.
If you have 10 or more years left before you need the money, a bear market may not be the worst thing in the world.
