Warren Buffett’s advice about what to do when the stock market plunges

Billionaire investor Warren Buffett has used it to plunge the stock market. He has seen many people in his long career. And in the 2019 letter to Berkshire Hathaway shareholders, he told us how to handle people.

And that’s advice worth listening to. Buffett has increased his profits by several thousand percent over the years, despite regular market downturns.

animal spirits

At Berkshire Hathaway, Buffett invests in listed stocks and takes ownership of the entire business. Meanwhile, the annual shareholder letter is available online for free to anyone who reads it, Berkshire shareholder or not.

But perhaps one of the biggest challenges for investors is the way the stock market can treat animal spirits. When stocks shoot higher, that enthusiasm can lead to euphoria.

And in some cases, that can lead to the appearance of over-confidence, chest-beating and self-satisfaction – or is it just me?

But that same animal spirit can work against investors when markets and stocks change direction and plunge. Common feelings can be anxiety, depression and loss of confidence. And these things can lead to tears and forehead slaps – but then again, I’ll have personal experience here!

However, Buffett always advocates keeping cool and maintaining a business-like perspective on investing.

In the 2019 letter, he said that there will be a big drop in the market. And sometimes the movement will be “of 50% of its size, or even more”.

But I’ll go further by adding that maybe not all stock markets are down. However, such sub-sections may be, such as small stocks, or cyclical stocks. Or maybe stocks in a particular niche in the sector could fall. Or it may be that individual companies facing short-term challenges are not favored by the market.

Keep the faith

And one of the most recent examples of this phenomenon is the method FTSE 100 index maintained its strength during the bear market last year. But beneath the surface, many share prices are experiencing absolute carnage.

Meanwhile, Buffett thinks “The American Tailwind” will always control the investee’s business in the long term.

And he believes the strength of the American economy will combine with the way businesses increase their income to generate satisfactory investment returns for them over time.

So far, he’s been right about that.

They consider stocks and shares “A better long-term option for people who don’t use borrowed money and who can control their emotions”.

And that’s why we often see them buying quality stocks when their prices are already marked up in the market. And why they tend to hold onto the carefully selected stocks they already own.

There is no guarantee of positive long-term results from investing in stocks. But I have the same faith in other Western economies, like the UK, for example. So, for me, Buffett’s approach to handling market downturns is equally valid for long-term investors targeting British investee companies.