Warren Buffett’s Advice for a Bear Market? Ride the American Tailwind

Billionaire investor Warren Buffett has lived through a few bear markets in his day. The aptly nicknamed “Oracle of Omaha” has experienced 13 market declines greater than 20%. That’s if you include the early 1940s downturn and this year’s market dip.

In those bear markets, Buffett watched the stock market wipe out billions in wealth, with share prices dropping as much as 56%. And yet, 80 years after he bought his first stock at age 11, he’s still in the business of buying companies.

The downturns haven’t dampened Buffett’s appetite for investing. Why? Buffett hinted at the answer in a 2018 letter to shareholders of Berkshire Hathaway, the conglomerate he runs. He referenced a trend he called the American Tailwind. Read on to find out if the tailwind can keep you as motivated and dedicated as Buffett through today’s tough market.

Image source: Getty Images.

What’s the American Tailwind?

To paraphrase Buffett, the American Tailwind is the ability of the U.S. capitalist economy to create value over the long term. Buffett cites the growth rate of the S&P 500 between 1942 and 2019, which averaged 11.8% annually. As he describes, if he’d invested his savings of $114.75 in a no-fee S&P 500 fund in 1942, it would have been worth $606,811 by 2019. That’s 5,288 times the original value.

Importantly, that tremendous growth happened despite several dramatic bear markets within the same time frame.

The tailwind and buy-and-hold investing

The long-term growth potential of the U.S. stock market is a core justification for buy-and-hold investing. Buy-and-hold involves purchasing stocks of well-run companies with proven track records. You then keep those stocks as long as there’s no fundamental, negative change to the company’s business model.

Buy-and-hold investors accept cyclical volatility and bear markets. They hold their good stocks through these tough times because they know a growth period will follow. Said another way, buy-and-hold investors are confident in Buffett’s American Tailwind that despite severe crises, the U.S. economy and stock market will pull through and return to growth.

Furthermore, the growth will be significant enough to produce average annual returns that outpace other asset classes — like cash or gold — over the long term.

How to ride the tailwind

Buffett’s approach — riding the tailwind — is simple enough for any investor to implement. The steps are:

Buy good stocks. Look for well-established companies that have powered through recessions and down markets in the past. They should have manageable debt, reliable cash flow, and disciplined leadership. If you’re not a stock picker, you could buy low-fee exchange-traded funds (ETFs) that hold these types of stocks. An S&P 500 index fund, for example, gets you into the 500 largest publicly traded companies in the U.S.
Hold those stocks until you have a good reason not to. A marketwide decline in share prices is not a good reason to dump a stock. That’s a temporary cycle that will resolve itself eventually. A good reason would be a major change that affects the company’s long-term prospects. Note that you wouldn’t have to make this decision if you’re invested in an S&P 500 index fund. If a company gets dropped from the index, the fund will drop it, too.
Wait for long-term gains to materialize. Let your equities grow for decades even through bear markets. If you earn dividends, reinvest them so they can grow, too.

Long term, the market grows

Equities produce strong returns over time. The hard part for investors is that those returns aren’t linear. Stock prices go up and down from year to year, and it’s tough to see the long-term picture in the down years. Today’s market proves that.

If you’re worried about how to proceed with your portfolio, remember Buffett’s American Tailwind. Our stock market has always recovered mightily from every downturn. Hold your good stocks and have faith they’ll power through. Embrace this time as an opportunity for American business to demonstrate its resilience once more.

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Catherine Brock has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway (B shares). The Motley Fool recommends the following options: long January 2023 $200 calls on Berkshire Hathaway (B shares), short January 2023 $200 puts on Berkshire Hathaway (B shares), and short January 2023 $265 calls on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.

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