3 Warren Buffett Investing Principles to Get You Through This Bear Market

With the S&P 500 down 17% year-to-date and my personal portfolio down much worse, I’ve been reflecting on the basics of investing lately. There’s something about a bull market that makes investors forget the fundamentals. Maybe it’s because everyone is making money regardless of due diligence, or maybe we just get lazy over time.


Bear markets are a gut check.

They are also incredibly humbling, and I’ve found the best remedy for the pain is recalibrating your mindset by getting back to the basics.

Perhaps, the best source of fundamental investing wisdom is the “Oracle of Omaha,” Warren Buffett. Here are three Buffett investing principles to get you through this bear market:

1. Be greedy when the market is fearful

In the 1986 Berkshire Hathaway (NYSE: BRK.A) Chairman’s Letter, Warren famously stated, “we simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.”

You never really know how hard this is until the market turns fearful, but this quote is an incredible reminder that in the near term, the market is driven by sentiment. And when sentiment turns sour, level-headed investors are usually presented with incredible opportunities.

It’s really easy to focus on the stocks in your portfolio that are down significantly, but the best way to rectify these underwater positions is to take advantage of extreme bargains in the market.

You don’t need to time the bottom perfectly, you just need to recognize when everyone else is running for the hills, and have the discipline to buy the high quality stocks they are selling.

This point is showcased by a company like PubMatic (NASDAQ: PUBM), a small cap programmatic advertising firm that is already profitable and looking considerably cheap now trading at approximately 3.7 times expected sales and 24 times forward earnings.

2. Don’t lose money

One of Buffett’s most widely referenced quotes is from a 1985 episode of Adam Smith’s Money World where he said: “The first rule of an investment is don’t lose [money], and the second rule of an investment is don’t forget the first rule.”

On the surface, this seems like a no-brainer and also entirely lacking in helpful information.

But to grasp this principle, you have to understand how you “lose” money in the stock market. The only way to truly lose money is to sell stocks for a loss.

Which leads to an important distinction: a stock’s price declining alone is not an indication that you should sell. The only reason to sell a stock for a loss is if your underlying investment thesis is no longer true.

A more insightful quote from Warren than the one above came at the 2020 Berkshire Hathaway annual shareholder meeting :

“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.”

There are a lot of stocks down 50% or more right now that are still great companies. In fact, even Berkshire Hathaway’s stock has fallen 50% on three different occasions throughout its history. If arguably the world’s most financially prudent business can fall 50% three times, pretty much any company can regardless of quality.

If the only rule of investing is to avoid losing money, you should refrain from selling beaten down stocks unless the underlying business is fundamentally flawed.

3. Don’t check prices everyday

My favorite Buffett quote of all time is:

“If you’re making a good investment in a security, it shouldn’t bother you if they closed down the stock market for five years.”

As investors, most of us understand the importance of taking the long term approach. And yet for some reason we track the prices of stocks every day. The two are counter intuitive.

If they shut down the market for 5 years, would you be comfortable with the holdings in your portfolio? If so, bear markets shouldn’t scare you. Of course that’s easier said than done, but avoiding checking your stocks every day can alleviate the stress of market volatility.

Find something outside of the stock market that brings you joy and focus on that instead. You’ll be doing your portfolio a huge favor.

The takeaway

Warren Buffett is the greatest investor of our time not necessarily because he’s been the smartest (although he’s certainly highly intelligent), but rather because he’s a master of tempering his emotions when the rest of the market is acting frantic. Group think is the enemy of investors, and while it may take years to master, being comfortable going against the crowd will let you see the forest from the trees when the market is in panic mode.

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The Motley Fool has positions in and recommends PubMatic, Inc. The Motley Fool recommends Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.

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