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Warren Buffett's 4 Rules for Investing in a Bear Market

Warren Buffett began his investing career in a bear market. He bought his first stock in the early 1940s at age 11 as the S&P 500 was on its way to a 35% dip that bottomed in 1942. Since then, he's managed through 12 more bear markets not including this one.

Despite those downturns, Buffett has managed to create billions in value for himself and the shareholders of the company he runs, Berkshire Hathaway. If any investor is qualified to share wisdom on investing in bear markets, it's Buffett.

So it makes sense to lean on his expertise to get through this tough climate with your wealth intact, right? To get you started, here are four of Buffett's famous rules for investing in a bear market.

Image source: Getty Images.

1. Buy quality merchandise on sale

"Whether we're talking about socks or stocks, I like buying quality merchandise when it is marked down."

Buffett invests in high-quality businesses -- companies with a proven ability to create shareholder value through all economic climates. In his view, bear markets provide opportunities to buy these quality stocks at lower prices.

As an example, Buffett's response earlier this year to the tech stock sell-off was to buy more of his favorite technology company, Apple. Although Apple already comprised more than 40% of Berkshire Hathaway's portfolio, Buffett bought another 3.78 million shares.

You can mimic his strategy by identifying stocks you love for their long-term prospects. If your budget allows, increase your investing activity and pad your share counts while prices remain low.

2. Hold forever

"Our favorite holding period is forever."

When you buy stocks you'd like to hold forever, bear markets become far less stressful. Since your plan is to hold for the long run, you don't have to do anything when the market goes sideways. No reshuffling your portfolio and no guessing when share prices will bottom out. Your only job is to wait.

3. Stay calm

"The most important quality for an investor is temperament, not intellect."

It's normal and useful to second-guess your "hold forever" plan when circumstances change. Certainly, there will be times when you should drop a stock you thought was a keeper.

The distinction you must make is whether circumstances have changed permanently or temporarily. And that's easier to do when you can analyze what's happening calmly and rationally. If you let your emotions take over, they can convince you to scrap your plan, cut your losses, or take some other dramatic action that's sure to dampen your long-term returns.

4. Keep your distance

Buffett said this when asked what advice he had for investors in tough markets: "I would tell them: Don't watch the market too closely."

Let's say you're confident that your "hold forever" stocks can withstand a temporary bear market. And for that reason, you're not going to react to falling share prices. In that scenario, what's the benefit of tracking every bump along the way? There isn't one.

It's OK to keep some distance from financial headlines when the market is going crazy. Consider it a survival strategy that helps you stay calm and stick to your investing plan.

Buy or do nothing

When a bear market sets in, you'll see Buffett mostly buy or hold. If you're questioning whether those are the right moves for your portfolio, remember this: Buffett is worth about $95 billion, and he has invested through more bear markets than almost anyone. His tactics can help you emerge from this bear market stronger and wealthier than ever.

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Catherine Brock has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple and Berkshire Hathaway (B shares). The Motley Fool recommends the following options: long January 2023 $200 calls on Berkshire Hathaway (B shares), long March 2023 $120 calls on Apple, short January 2023 $200 puts on Berkshire Hathaway (B shares), short January 2023 $265 calls on Berkshire Hathaway (B shares), and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.


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