Stocks have been shaky in recent weeks, with the S&P 500 (^GSPC +0.36%), Dow Jones Industrial Average (^DJI -0.38%), and Nasdaq Composite (^IXIC +0.83%) slipping by around 3%, 4%, and 8%, respectively, from their recent all-time highs.
Investors are also feeling pessimistic about the future. The Fear and Greed Index measures investor sentiment on a scale from 0 to 100, with lower numbers indicating fear and higher values suggesting greed. As of this writing, the index sits at just 23 — in the “extreme fear” category.
If a stock market crash is coming, it’s not all bad news for investors. Warren Buffett has a simple seven-word strategy for times like these, and it could help you generate life-changing wealth amid market volatility.
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Bad news is an investor’s best friend
In 2008, Buffett penned an opinion piece for The New York Times. The U.S. was deep into the Great Recession at that point, with the S&P 500 having plunged nearly 40% over the previous year, and many investors were losing hope that the market would ever recover.
In the essay, Buffett encouraged investors to not only stay in the market, but to buy more. He noted that the market had endured severe hardship over the previous century and still managed to deliver record-shattering returns. Those who reaped the biggest rewards were the investors who continued buying.
“[B]ad news is an investor’s best friend,” he emphasized. “It lets you buy a slice of America’s future at a marked-down price.”
Since that piece was published, the S&P 500 has earned total returns of more than 1,000%. In other words, if you’d invested $10,000 in an S&P 500 ETF the day Buffett offered this advice, you’d have more than $112,000 by today.
“You might think it would have been impossible for an investor to lose money during a century marked by such an extraordinary gain,” Buffett continued, discussing the Dow’s meteoric rise from 66 to 11,497. “But some investors did. The hapless ones bought stocks only when they felt comfort in doing so and then proceeded to sell when the headlines made them queasy.”
History says this is the best move investors can make
If the headlines are making you queasy right now, that’s understandable. But the right investments can set you up for lucrative long-term returns, even if a crash or recession is coming.
Not all stocks are strong enough to weather a significant downturn. During the dot-com bubble burst, for example, countless tech companies crashed and never recovered. Many powerful companies collapsed during the Great Recession, too. Whenever the next bear market begins, there will inevitably be some companies that don’t pull through.
Organizations with strong foundations are the most likely to succeed. These companies will have sustainable competitive advantages, sound finances, competent leadership teams, and other factors that set them apart from their peers.
“To be sure, investors are right to be wary of highly leveraged entities or businesses in weak competitive positions. But fears regarding the long-term prosperity of the nation’s many sound companies make no sense. These businesses will indeed suffer earnings hiccups, as they always have. But most major companies will be setting new profit records 5, 10 and 20 years from now.”-Warren Buffett, The New York Times (2008)
Over time, the market is all but guaranteed to thrive. Since 1919, the S&P 500 has ended every one of its rolling 20-year periods with positive total returns. This means that if you’d invested in the S&P 500 at any point in the last century and held your investment for 20 years, you’d have made money.
Nobody can say when the next market crash or recession is coming, but strong companies are the most likely to thrive over time. With a healthy portfolio and a long-term outlook, you can set yourself up for lucrative gains.
