investors should be prepared for their stocks to potentially drop by 50%
Warren Buffett, a renowned investor, often advises being cautious when others are greedy and bold when others are fearful. During a 2020 Berkshire Hathaway shareholder meeting, he emphasized that some people are more prone to fear than others, which can lead to poor investment decisions. He warned that investors should be prepared for their stocks to potentially drop by 50% or more and remain comfortable with their holdings despite the downturn.
Buffett explained that the right mindset is crucial for successful investing. Some individuals are not psychologically suited to own stocks because they might panic and sell at the wrong times. He noted that neither he nor his late business partner, Charlie Munger, has ever felt financial fear, a trait that has helped them stay focused on fundamentals and make smart decisions during market turmoil.
Buffett isn’t alone in highlighting the importance of investor psychology. Peter Lynch, a legendary mutual fund manager, once said that in the stock market, the stomach is more important than the brain, as markets are always unpredictable and there’s always something to worry about. Staying calm and focused on long-term goals during market volatility is essential for reaping benefits when the market recovers.
Buffett recommends viewing stocks similarly to how one would view farmland: as a long-term investment, ignoring daily fluctuations in value. Historical data supports this perspective, showing that while the probability of loss in the U.S. stock market is higher over a one-year period, it drops significantly over a 20-year period. Despite this, many investors today are increasingly interested in short-term trading, with the average holding period for stocks decreasing from five years in the 1970s to just 10 months in the 2020s.
Buffett explained that the right mindset is crucial for successful investing. Some individuals are not psychologically suited to own stocks because they might panic and sell at the wrong times. He noted that neither he nor his late business partner, Charlie Munger, has ever felt financial fear, a trait that has helped them stay focused on fundamentals and make smart decisions during market turmoil.
Buffett isn’t alone in highlighting the importance of investor psychology. Peter Lynch, a legendary mutual fund manager, once said that in the stock market, the stomach is more important than the brain, as markets are always unpredictable and there’s always something to worry about. Staying calm and focused on long-term goals during market volatility is essential for reaping benefits when the market recovers.
Buffett recommends viewing stocks similarly to how one would view farmland: as a long-term investment, ignoring daily fluctuations in value. Historical data supports this perspective, showing that while the probability of loss in the U.S. stock market is higher over a one-year period, it drops significantly over a 20-year period. Despite this, many investors today are increasingly interested in short-term trading, with the average holding period for stocks decreasing from five years in the 1970s to just 10 months in the 2020s.