Buying When Markets Fall – Another Lesson from Warren Buffett

This is a counterintuitive move, but yet a logical one.  

Jocelyn Jovene 30 September, 2022 | 2:55AM
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Warren Buffett

For many investors, falling financial markets can be painful. Not only do they see the value of the investments take a dive, but they tend to fear for the future and don’t know what to do. Some tend to sell when the prices are falling, which clearly is a mistake unless the underlying value of the asset is stranded; others consider buying more but they are afraid that the market will keep falling.

Others hesitate, worrying about the adage, ‘You don’t catch a falling knife.’ For this group of people I recommend reading the op-ed Warren Buffett wrote in the New York Times a month after the bankruptcy of investment bank Lehman Brothers in October 2008.

The reason I would recommend this reading is that it really helps put what’s currently happening in the financial markets into perspective – and helps investors focus on what really matters, i.e. the underlying ability of businesses to grow their earnings over the long run.

The fall of Lehman Brothers in October 2008 marked the start of the ‘Global Financial Crisis’. In the subsequent months, the S&P 500 went from 1,193 points on September 15 to 677 points, on March 9 of 2009, which is considered the trough of the market.

Words of Wisdom from Warren Buffett on Falling Markets

When the NYT published Buffett’s op-ed, the market had tanked close to 21% and would remain volatile. What did the ‘Oracle of Omaha’ say in this difficult time? In a nutshell:

  • Gloom and fear have already occurred in the past (the Great Depression, World War 2 or the inflation episodes of the late 70s-early 80s).
  • Trying to predict when the market will hit the bottom is a waste of time and can make you miss the rebound.
  • Holding on to cash is equivalent to losing money (especially when inflation is high).
  • Fear gives rational investors an opportunity to invest in great businesses at cheap valuation.
  • If you think over the long run, you know that great businesses will not escape a recession or a downturn but they will return to better fortunes some day down the road.

As Buffett says: ‘Fears regarding the long-term prosperity of the nation’s many sound companies make no sense. These businesses will indeed suffer earnings hiccups, as they always have. But most major companies will be setting new profit records 5, 10 and 20 years from now.’

This statement is so true you can reprint it today and fill as comfortable as Buffett when he started buying stocks of great businesses, even though the stock market didn’t reach a trough.

Note: Since October 2008, the S&P 500 has reached a record of 4,797 points on Jan 3, 2022 before falling back to 3647 points currently (-24 %). In the meantime, earnings of the constituents of the index have rebounded from 94 $ a share to 235 $ at the moment. Buffett’s predictions were, unsurprisingly, correct.



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Jocelyn Jovene

Jocelyn Jovene  Senior Financial Analyst, Morningstar France

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