Warren Buffett has repeatedly told investors that staying invested in quality businesses for long periods despite market volatility is crucial for success in the stock market.
Discussing the dynamism of the U.S. economy in his 2016 letter to Berkshire Hathaway Inc. (NYSE:BRK, BRK.B)) shareholders, Buffett said that quality businesses in the country are “virtually certain” to see their worth increase in the coming years. However, he warned that many companies could be left behind due to occasional market downturns.
Buffett said no one can predict market declines and “traumas” but offered advice for investors on how to respond when they occur.
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“The years ahead will occasionally deliver major market declines – even panics – that will affect virtually all stocks,” Buffett wrote. “During such scary periods, you should never forget 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.”
Since Buffett’s comments, the S&P 500 has posted double-digit gains every year except in 2018, when the index fell about 4.4%, and in 2022, when it dropped roughly 18%.
‘Gloomy Forecasts’
Buffett said in his 2016 letter that investors who can simply overcome their personal fear and sit through market volatility with their investments in large and “conservatively financed” businesses will “almost certainly do well.”
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Buffett cautioned investors to remain wary of naysayers who thrive on “gloomy forecasts” and said entrepreneurial spirit, productivity gains, abundant capital and innovation will continue to drive the U.S economy higher.
“No one can tell you when these traumas will occur,” he said.
‘Returns Fall as Assets Increase’
Buffett said that he believes Berkshire’s normalized earnings per share will continue to grow every year, and its strong business portfolio and financial strength will allow the company to deliver solid results in the future.
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Despite year-to-year swings, Berkshire’s EPS rose overall since Buffett’s 2016 letter through the end of 2024.
However, Buffett told investors in the 2016 letter that Berkshire’s size makes it difficult to achieve the extraordinary returns it delivered before that point.
“As for Berkshire, our size precludes a brilliant result: Prospective returns fall as assets increase,” he said.
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