Warren Buffett says this type of investor benefits most when stock prices fall

Thinking like a buyer can make market downturns easier to manage.

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This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Warren Buffett has a different perspective than most on stock market declines, and it's hard not to think he's got it right. After all, Buffett is among the world's richest billionaires and most successful investors. His view on market cycles has clearly served him well.

Here's a look at what Buffett has to say about falling stock prices, and how you can safely implement his tactics.

Net buyers of stock

In a 2020 interview with CNBC, Buffett said "net buyers" of stocks benefit when the stock market goes down. By "net buyers," he means investors who do more stock buying than selling.

And guess what? You are probably a net buyer. Anyone who invests monthly in a retirement account can be a net buyer. Buy-and-hold investors are also typically net buyers.

For net buyers, lower stock prices can mean greater gains potential, assuming you keep investing when the market dips. In Buffett's view, net buyers should celebrate down markets -- in the same way you might take advantage of lower food or gas prices.

Think of it this way. If you're investing regularly and selling infrequently, it's logical to focus on stock prices as they relate to buying, not selling. And for buyers, lower stock prices are a good thing.

How Buffett celebrates lower stock prices

Buffett puts this perspective into practice, too. When the stock market turns, he often ramps up his buying activity -- taking advantage of those lower share prices before they disappear.

When the market eventually recovers, the company stands to log some nice gains on those buys.

This is exactly what happened in the first half of 2022, when the S&P 500 fell roughly 20%. Berkshire Hathaway, the conglomerate Buffett runs, invested nearly $44 billion net of sales during the dip.

How to invest in downturns safely

Investing in down markets can raise your portfolio's long-term earnings potential -- but it's not for everyone. Buffett obviously has unmatched resources plus decades of experience on his side. For the rest of us, buying in a downturn can be stressful.

For that reason, it's smart to move forward conservatively. These guidelines will help:

  1. Do not invest money you'll need to spend in the next five years. Even better if you can give your investments 10 or 20 years to accumulate gains.
  2. Buy companies you know. Don't use this time to speculate. Instead, lean into mature companies with a proven ability to power through down economies and other crises. You can also invest in large-cap ETFs for diversification on a budget.
  3. Invest a small amount each week or month. Small, periodic investments have lower timing risk than one big investment. Timing risk is the chance a stock's price will dip dramatically just after you buy it. The slow-and-steady approach also lets you gauge your comfort level and adjust your plan accordingly before you've locked up your life savings for years.

Embrace the buyer's outlook

Even if you choose not to increase your investing activity in this tough market, you might try experimenting with a net-buyer outlook.

Instead of focusing on how much your portfolio's value has declined, look for opportunity. Watch how your favorite stocks are responding, and imagine how they might fare in a recovery. You might even track a simulated portfolio on paper.

The exercise should make this market more tolerable emotionally. And by the time the next down market rolls around, you'll have a strategy to work through it -- just like Buffett will.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Catherine Brock has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Berkshire Hathaway (B shares). The Motley Fool Australia's parent company Motley Fool Holdings Inc. has recommended the following options: long January 2023 $200 calls on Berkshire Hathaway (B shares), short January 2023 $200 puts on Berkshire Hathaway (B shares), and short January 2023 $265 calls on Berkshire Hathaway (B shares). The Motley Fool Australia has recommended Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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