5 Warren Buffett Principles to Remember in a Volatile Stock Market
The stock market is unpredictable — all the time
In his most recent letter to Berkshire Hathaway shareholders, Buffett said: “The years ahead will occasionally deliver major market declines — even panics — that will affect virtually all stocks. No one can tell you when these traumas will occur.”
The takeaway: The stock market is unpredictable, and large price swings are normal. And to be perfectly clear, this applies to the upside as well. I’ll spare you the statistics lesson, but a gain of 45% or a loss of nearly 23% on the S&P 500 in any single year would not be considered unusual. Manage your expectations (and your reactions) accordingly.
Over the long term, there’s only one direction the market will go
“Successful investing takes time, discipline and patience. No matter how great the talent or effort, some things just take time: You can’t produce a baby in one month by getting nine women pregnant,” Buffett has said.
While stocks can be wildly unpredictable over shorter time periods, they are surprisingly predictable over long periods. Over periods of several decades, the stock market has generated annualized returns of 9% to 10% per year. Since 1965, the S&P 500 has produced annualized total returns of 9.9%, for example, and this includes the dot-com bust, Black Monday in 1987, and the Great Recession. The point: Even the worst crashes are rather meaningless when it comes to long-term returns.