Warren Buffett, the legendary Oracle of Omaha, is known for his sage advice on investing in stocks. One of his most enduring lessons is to “be fearful when others are greedy and to be greedy only when others are fearful.”
But at the 2020 Berkshire Hathaway shareholder meeting, Buffett took this wisdom a step further, offering a stern warning to those who might not have the right temperament for the stock market. He cautioned that “some people really shouldn’t own stocks” because they simply “can’t handle it psychologically.”
In this meeting, Buffett likened the fear some investors experience to the ferocity of a COVID-19 infection. “You’ve got to be prepared, when you buy a stock, to have it go down 50% — or more — and be comfortable with it, as long as you’re comfortable with the holding,” he emphasized. This sentiment underscores the volatility inherent in the stock market and the importance of psychological resilience for those who choose to invest.
Buffett’s advice isn’t just about surviving market downturns; it’s about thriving in them. He and his long-time business partner, the late Charlie Munger, have always maintained a calm demeanor, even when markets are in turmoil. Their ability to focus on fundamentals and ignore the noise of the market has been key to their success. For example, during the 2008 financial crisis, when most investors were running for the exits, Buffett was busy investing in companies like Goldman Sachs, NRG Energy, Kraft Heinz, Becton Dickinson and Co., and General Electric. He saw the plunging stock prices as an opportunity to buy solid companies at a discount, a strategy that has served him well throughout his career.
Investor psychology plays a crucial role in long-term success, a point that’s been echoed by other investment greats as well. Peter Lynch, the legendary mutual fund manager, once remarked during a 1994 lecture at the National Press Club that “the key organ in your body in the stock market is the stomach, not the brain.” Lynch’s point was that the market will always present something to worry about, but successful investors must learn to ignore the noise and focus on owning good companies. “All you must know is that it’ll always be scary, there will always be something to worry about. You must forget all about it. Cut it all out and own good companies or own turnarounds. Study them and you’ll do well,” Lynch advised.
The danger of panic selling during market downturns cannot be overstated. When the market crashes, it’s easy to let fear take over and sell at a loss. However, history has shown that those who stay the course and focus on the long-term often come out ahead. A study by Lazard Asset Management analyzed decades of data and found that the most profitable days for investors tend to occur in the midst of bear markets. This means that by selling in a panic, investors often miss out on the recovery that inevitably follows.
For those who find themselves tempted by fear, Buffett suggests adopting a different mindset. “You shouldn’t buy stocks unless you expect, in my view, you expect to hold them for a very extended period and you are prepared financially and psychologically to hold them the same way you would hold a farm, and never look at a quote,” he said. In other words, treat your stock investments like you would a piece of farmland. Farmers don’t worry about the daily price of their land; they focus on the long-term value of the asset. Similarly, stock investors should ignore the daily fluctuations and focus on the long-term prospects of the companies they own.
Buffett’s analogy is supported by historical data. According to an analysis by Wealthfront, the probability of loss if you invested in the entire U.S. stock market for any single year was 25.2%. However, if you extended your investment horizon to 20 years, the probability of loss dropped to 0%. This data highlights the importance of patience and a long-term perspective in the stock market.
Despite Buffett’s advice, many investors today have become more focused on short-term trading. The average holding period for an individual stock in the U.S. has plummeted from five years in the 1970s to just 10 months in the 2020s, according to Ben Laidler, former global markets strategist at eToro. This shift toward shorter holding periods reflects a growing impatience among investors, who are increasingly looking for quick profits rather than long-term gains.
Warren Buffett’s message is clear: to succeed in the stock market, you need to have the right mindset. This means being prepared for significant downturns, staying focused on the long-term, and resisting the urge to panic sell. In a market that is increasingly driven by short-term thinking, Buffett’s timeless advice serves as a reminder that patience and psychological resilience are the keys to enduring success.
