One of Warren Buffett’s most famous pieces of advice is, “Be afraid when others are greedy, and be greedy only when others are afraid.”
But at the 2020 Berkshire Hathaway shareholder meeting, Oracle of Omaha had more to add on the matter. “Some people are more susceptible to fear than others.”
He talked about why the right mindset and perspective are so important for investors. He believes that some people “really shouldn’t own stocks” because they “couldn’t bear it psychologically” and would “buy and sell stocks at the wrong times.”
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During the meeting, Buffett likened the fear to the coronavirus, saying it “hits some people much harder than others.”
“When you buy a stock, you have to be prepared for a decline of 50% or more, and you have to accept that as long as you’re happy with holding it,” he said.
He added that he has never felt any financial fear and doesn’t think his business partner, the late Charlie Munger, has either.
It is clear that this lack of fear has allowed the pair to remain calm, focus on fundamentals, and make smart decisions even during market turmoil.
For example, Buffett was an active investor in Goldman Sachs, NRG Energy, Kraft Heinz, Becton Dickinson & Company, and General Electric during the 2008 financial crisis. The sharp drop in stock prices during this period allowed famous value investors to pick up a lot of bargains.
Buffett isn’t the only investor to talk about the importance of psychology in stock market investing. In a speech at the National Press Club in 1994, legendary former mutual fund manager Peter Lynch said, “In the stock market, the important organ of the body is the stomach, not the brain.”
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He continued, “What you need to know is that it’s always scary and there’s always something to worry about. You have to forget all about it. Cut it all out and get a good company. Own them or reproduce them yourself. Study them and you’ll be fine.”
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Panic selling during a market crash can be extremely detrimental to long-term returns. By maintaining a long-term perspective during times of volatility, investors can benefit as the market recovers over time. Analysts at Lazard Asset Management examined decades of data and also found that the most profitable days for investors tend to be in the middle of (or very near) a bear market. .
For investors worried about falling prey to fear and panic, Buffett recommends changing your perspective.
he said: “My view is that you are financially and psychologically prepared to hold stocks in the same way you would hold a farm, with the expectation that you will hold them for a very long time, and that you will never look away. You shouldn’t buy stocks unless you pay based on the quote and never pay any attention.”
Investors in farmland are used to not knowing exactly what their property is worth, and it is not a major priority for them. They only know the price they paid and do not receive daily estimates of its value. You will only know the value of your land many years after you purchase it, when you sell it to someone else.
A similar perspective can be helpful for stocks. Wealthfront analyzed monthly returns from July 1926 to September 2023 and found that if you invested in the entire U.S. stock market for one year, your probability of loss was 25.2%. However, the probability of loss if you invest has decreased to 0%. 20 years.
Despite this data and Buffett’s recommendation, investors are increasingly interested in regular trading. The average holding period for individual U.S. stocks has fallen from five years in the 1970s to just 10 months in the 2020s, said Ben Laidler, former global market strategist at eToro.
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