Be Prepared for Any Stock You Buy to Plunge by '50% or More

At a 2020 Berkshire Hathaway meeting, the Oracle of Omaha reminded investors of a crucial truth: when you buy a stock, be prepared for it to plunge by 50% or more. This isn't just about numbers; it's about having the right mindset. Some people, he noted, "really shouldn’t own stocks" because they can't handle the psychological rollercoaster and might buy or sell at the wrong times.

Buffett's approach to investing is as much about psychology as it is about numbers. He famously advises to "be fearful when others are greedy and to be greedy only when others are fearful." But at that 2020 meeting, he added an important caveat: "Some people are more subject to fear than others." This observation gets to the heart of why some investors succeed while others fail, even when presented with the same market conditions.

The ability to control one's emotions in the face of market turmoil is, in Buffett's view, a prerequisite for successful investing. He believes that some people "really shouldn't own stocks" because they "can't handle it psychologically" and would "buy and sell them at the wrong time." It's a harsh assessment, but one that comes from years of observing human behavior in the market.

Buffett likens the fear that grips some investors to the way COVID-19 affects different people. Just as the virus "strikes some people with much greater ferocity than others," fear in the market can paralyze some investors while leaving others unfazed. Buffett himself claims to have never felt financial fear, a trait he believes he shared with his late business partner, Charlie Munger.

This lack of fear has been a cornerstone of Buffett's investment strategy, allowing him and Munger to stay calm and focused on fundamentals even when markets are in turmoil. It's what enabled Buffett to invest heavily in companies like Goldman Sachs, NRG Energy, and Kraft Heinz during the 2008 financial crisis, when others were running for the hills. These moves, made when stock prices were plummeting, allowed Buffett to snag incredible bargains that have paid off handsomely in the years since.

Buffett isn't alone in emphasizing the importance of psychology in investing. Peter Lynch, the legendary former mutual fund manager, once quipped that "the key organ in your body in the stock market is the stomach, not the brain." Lynch's point, much like Buffett's, is that successful investing requires the ability to withstand the gut-wrenching drops and dizzying climbs that characterize the stock market.

For those who find themselves prone to panic when the market dips, Buffett offers a change in perspective. He suggests thinking of stocks the same way you would think of a farm. "You shouldn't buy stocks," he advises, "unless you expect to hold them for a very extended period and you are prepared financially and psychologically to hold them the same way you would hold a farm, and never look at a quote."

This farming analogy is particularly apt. Farmers don't obsess over the daily or even yearly fluctuations in the value of their land. They focus on the long-term productivity and potential of their investment. Similarly, Buffett argues, stock investors should focus on the long-term potential of the companies they invest in, rather than the day-to-day price movements.

The data backs up this long-term approach. According to an analysis by Wealthfront, the probability of losing money if you invested in the entire U.S. stock market for any one-year period was 25.2%. However, if you extended that investment period to 20 years, the probability of loss dropped to 0%. In other words, patience isn't just a virtue in investing – it's a strategy for success.

Despite this compelling evidence and Buffett's consistent advice, many investors today seem to be moving in the opposite direction. The average holding period for an individual stock in the U.S. has dropped dramatically, from five years in the 1970s to just 10 months in the 2020s. This shift towards short-term trading runs counter to everything Buffett has preached over the years.

Ssuccessful investing isn't about having a crystal ball or a secret formula. It's about having the right mindset. It's about being prepared for the inevitable ups and downs of the market, staying focused on the long term, and not letting fear or greed drive your decisions. It's about treating your stocks like farms – assets to be nurtured and held for the long haul, not traded on a whim.

As we navigate the uncertain waters of today's market, Buffett's wisdom serves as a steady rudder. By embracing his long-term perspective and cultivating a resilient mindset, investors can weather the storms of market volatility and potentially reap the rewards of patient, disciplined investing. After all, as Buffett himself might say, the stock market is a device for transferring money from the impatient to the patient.