‘Some people are more subject to fear’: Warren Buffett cautioned that you should be ready for any stock you buy to plunge ‘50% or more’ — how to deal with market chaos

Investor psychology

During the meeting, Buffett compared fear to COVID, saying that “it strikes some people with much greater ferocity than others.”

"You’ve got to be prepared, when you buy a stock, to have it go down 50% — or more — and be comfortable with it, as long as you’re comfortable with the holding," he said.

He added that he has never felt financial fear and doesn’t believe his business partner, the late Charlie Munger, has either.

It's clear this lack of fear has allowed the duo to stay calm, focus on the fundamentals, and make smart decisions even when markets are roiled.

For instance, Buffett was actively investing in Goldman Sachs, NRG Energy, Kraft Heinz, Becton Dickinson and Co. and General Electric during the 2008 financial crisis. Plunging stock prices during this era allowed the famous value investor to grab plenty of bargains.

Buffett isn’t the only investor who has talked about the importance of psychology in stock market investing. During a 1994 lecture at the National Press Club, Peter Lynch, a legendary former mutual fund manager, said, “The key organ in your body in the stock market is the stomach, not the brain.”

He continued, “All you must know is that it’ll always be scary, there will always be something to worry about. You must forget all about it. Cut it all out and own good companies or own turnarounds. Study them and you’ll do well.”

Panic selling when the market crashes is extremely detrimental to long-term returns. Staying focused on the long-term during period of volatility allows investors to reap the benefits when markets recover with time. Analysts at Lazard Asset Management looked at several decades of data and also found that the most profitable days for investors tend to fall in the middle of (or in the direct vicinity of) bear markets.

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Buy stocks like farms

For investors worried about falling prey to fear and panic, Buffett recommends a change in perspective.

He said, “You shouldn’t buy stocks unless you expect, in my view, you expect to hold them for a very extended period and you are prepared financially and psychologically to hold them the same way you would hold a farm, and never look at a quote, and never pay — you don’t need to pay attention to them.”

Investors in farmland are accustomed to not knowing exactly what their asset is worth, and it's not a major priority for them. They only know the price they paid and do not receive a daily quote on what it’s worth. Only when they sell the land to someone else, potentially many years after they bought it, do they find out what it’s worth.

A similar perspective on stocks could be beneficial. The probability of loss if you had invested in the entire U.S. stock market for any one year was 25.2%, according to Wealthfront’s analysis of monthly returns from July 1926 to September 2023. However, the probability of loss dropped to 0% if you had invested for a 20-year period.

Despite this data and Buffett’s recommendations, investors have become more interested in regularly trading. The average holding period for an individual stock in the U.S. dropped from five years in the 1970s to just 10 months in the 2020s, according to Ben Laidler, the former global markets strategist at eToro.