The stock market has been rocked by high inflation and rising interest rates this year. The broad base S&P500 and the tech-heavy Nasdaq Composite have fallen for three consecutive quarters, marking their longest losing streak since the Great Recession ended in 2009. Both indexes have fallen into bear markets, with the S&P 500 currently down 22% from its high and the Nasdaq Composite down 31%.
Losses of this magnitude can unsettle investors or even make them anxious. These emotions often lead to poor judgment, which can cause lasting damage to your portfolio. Fortunately, Warren Buffett and Peter Lynch have shared some relevant wisdom over the years, and investors would do well to heed their advice.
Advice from Warren Buffett
Warren Buffett is often called the “Oracle of Omaha,” a reference to his uncanny stock-picking skills and Nebraska residency. Buffett has built this reputation over several decades by Berkshire Hathaway (BRK.A -2.47%) (BRK. B -2.63%) to finance its investment activities. Berkshire’s stock is up more than 3,600,000% since he took the helm in 1964, and the company has grown into a $600 billion behemoth. Unsurprisingly, Buffett has become something of a North Star for many investors.
During the Great Recession, Buffett wrote an opinion piece for The New York Times, and one quote in particular has become part of the investment story. First mentioning the miserable state of the stock market, he went on to say, “One simple rule guides my purchases: Be fearful when others are greedy, and be greedy when others are fearful.” Those words have been repeated countless times since, but they are particularly relevant in the current bear market.
Fear is everywhere right now. Inflation hit a 40-year high earlier this summer, interest rates are rising at a pace not seen since the 1980s, and several other scary things — geopolitical strife, supply chain disruptions and pandemic lockdowns — have hit the financial world embarrassed alarm condition. But historical data suggests that bear markets are the best time to buy stocks, and Buffett’s words reflect that sentiment.
To be clear, stock market downturns can drag on for months or even years, but Buffett has consistently advocated a long-term mentality. In his commentary, he noted that investors were right to be concerned about companies in weak competitive positions, but “concerns about the long-term prosperity of the country’s many solid companies make no sense.” And there are many solid companies today.
Advice from Peter Lynch
Peter Lynch became an investment legend while managing the Magellan Fund at Fidelity. Under his leadership, the fund posted an annualized return of 29.2%, growing more than twice as fast as the S&P 500. That happened between 1977 and 1990, a period in history marked by global oil shocks, rampant inflation, and high interest rates was embossed . Sound familiar?
Lynch ran the Magellan Fund for just 13 years, but during that time he struggled through two bear markets and six market corrections. This makes his outperformance even more impressive and his opinions all the more credible. With that in mind, Lynch once said, “The real key to making money from stocks is not being afraid of them.”
The stock market is currently in a state of disarray, and many investors may be tempted to cut their losses by withdrawing. But I think Lynch would recommend the opposite. He once said, “A correction is a wonderful opportunity to buy your favorite companies at a bargain price.”
Trevor Jennewine 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.