Investing in a bear market: The Buffet Way

July 17, 2023

Principles on how to invest during recessionary environments, directly from the horse's mouth.

At the time of writing, the S&P 500 and Nasdaq indices are down by 20% and 30% respectively from their November 2021 levels. 

So, how should we invest in these tough economic environments? Well, if there is one person who knows the answer, it is the Oracle himself: Mr Warren Buffett. This article explores the principles of investing in a bear market, right from the horses mouth.


Be a business picker and not a stock picker

Our goal is to have meaningful investments in businesses with both durable economic advantages and first-class CEOs. Charlie and I are not stock-pickers we are business-pickers.

When Buffett invests, he does not care how the stock will perform the next day, next week, or the next month. If a business does well, the stock eventually follows.


Buy more dividend-growth stocks instead of hyper-growth stocks.

Generally speaking, dividend growth companies tend to be more established, have better finances, and have much more consistent free cash flows than hyper-growth stocks that are not profitable yet. In a bear market, dividend-growth stocks tend to perform much better than the market average. 

So, what are we looking for in a bear market? Companies that have:

  • excellent brands
  • large moats that cannot be easily copied by competitors. 
  • consistent revenue growth, free cash flow growth, earnings per share growth, and dividend growth over time. 
  • Use their free cash flows to buy back shares. 

According to Buffet, these companies have the abovementioned characteristics:

  • Apple (AAPL)
  • Bank of America (BAC)
  • American Express (AXP)
  • Chevron (CVX)
  • Coca-Cola (KO)


Be greedy when the market is fearful and be fearful when the market is greedy 

No one knows when the market reaches the bottom and when the market reaches its peak. 

The interesting thing is, you know, obviously we havent the faintest idea what the stock market is going to do when it opens on Monday. We never have had.

So, what do we do if we cant reliably time the market? The best time to sell is when the market feels extremely greedy and euphoric. This is when most stocks are overvalued and are traded well above their intrinsic values. The best time to buy is when the market feels very depressed and hopeless. This is when most stocks are substantially undervalued and are traded below their intrinsic values. 


Have a very long investing time frame

Stocks tend to perform very well over the long run because stock market growth is a direct function of economic growth. Economic growth in almost all countries increases over time its just the rate of growth that differs. 

Benjamin Graham said this: In the short run, the market is a voting machine but in the long run, it is a weighing machine. The market can be very greedy, fearful or irrational in the short term. In the long term, the market is a weighing machine and is much more rational. 

Please note particularly that we own stocks based upon our expectations about their long-term business performance and not because we view them as vehicles for timely market moves.


Never bet against America

Buffett recommends that most investors invest in low-cost index funds such as the S&P 500 over the long run. He suggests investing at regular intervals (weekly or monthly) and holding for the long term.

I think the thing that makes the most sense practically, all of the time, is to consistently buy an S&P 500 low-cost index fund, keep buying it through thick and thin, and especially through thin. Just keep buying. America will always do well in the long-term.

Buffett only sells his stocks for specific reasons:

  • When he realizes that he made a mistake in his investment thesis
  • The business he invested in is no longer an outstanding business
  • He wants to free up more cash to invest in better opportunities.


Invest in yourself

The best thing you can do is to be exceptionally good at something. If youre the best doctor in town, if youre the best lawyer in town, if youre the best whatever it may be, no matter whether people are paying you a zillion dollars, theyre going to give you some of what they produce in exchange for what you deliver. 

Regardless of the economy or how well the market is doing, the best investment is investing in yourself.  So, the best investment by far is anything that develops yourself. And, again, its not taxed. So thats what I would do.




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