Warren Buffett’s 2-Step Plan for Surviving the Next Bear Market

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The Oracle of Omaha praises index funds, rips hedge fund managers and offers some important advice to prepare you for the next market downturn.

Warren Buffett has penned another in a long line of annual letters to shareholders of Berkshire Hathaway, the holding company of which he is chairman and CEO. This year’s letter — released over the weekend — addresses a wide range of topics.

Most media reports have focused on how the Oracle of Omaha excoriates hedge fund managers and the high fees they charge. Buffett says investors are better off skipping the siren song of hedge funds and investing in index funds instead.

And Buffett has recent history to back him up. In 2010, the billionaire Buffett made a 10-year bet with New York’s Protege Partners, wagering that $500,000 invested in a simple S&P 500 index fund would perform better than $500,000 invested in a basket of hedge funds chosen by Protege.

Nine years into the bet, it’s not even close, according to Fortune:

The index fund has registered a compounded annual increase of 7.1%. And the average for the five (hedge) funds (whose names have never been made public) is 2.2%.

Buffett’s endorsement of index funds echoes what Money Talks News founder Stacy Johnson has advocated for years.

Don’t fear the bear

Buffett’s letter also featured another crucial piece of investing advice, a nugget of wisdom that is likely to serve you well in the not too distant future.

Although the stock market is at record highs, Buffett reminds us that a major market decline will occur eventually. As he writes:

The years ahead will occasionally deliver major market declines — even panics — that will affect virtually all stocks.

He goes on to say that no one can predict when these downturns will occur. However, he reassures investors that they need not worry about bear markets — or even vicious stock market crashes — as long as they remember two things:

First, widespread fear is your friend as an investor, because it serves up bargain purchases. Second, personal fear is your enemy. It will also be unwarranted. Investors who avoid high and unnecessary costs and simply sit for an extended period with a collection of large, conservatively-financed American businesses will almost certainly do well.

Buffett’s reflection amplifies one of his most famous bits of investing advice: “Be fearful when others are greedy, and be greedy when others are fearful.”

So, hold on through thick and thin — and possibly even buy more stock at times when things look especially thin — and you’ll do just fine. As Buffett writes, it’s always been a mistake to bet against America, and the future is likely to be brighter than the past:

You need not be an economist to understand how well our system has worked. Just look around you. See the 75 million owner-occupied homes, the bountiful farmland, the 260 million vehicles, the hyper-productive factories, the great medical centers, the talent-filled universities, you name it – they all represent a net gain for Americans from the barren lands, primitive structures and meager output of 1776.

What do you think about Warren Buffett’s latest letter? Sound off by commenting below or on our Facebook page.

Stacy Johnson

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