In Warren Buffett's latest letter to Berkshire Hathaway's shareholders, the Oracle of Omaha offered his long-term predictions for American stocks, as well as some excellent advice investors such as you and I can use to profit when things go badly.
Simply put, Buffett has no worries about the long-term prospects of American business, and therefore the stock market's performance. In his letter to shareholders, Buffett pointed out that the Dow Jones Industrial Average gained 72% from the end of the 20th century through the end of 2016.
He also remarked that "American business -- and consequently a basket of stocks -- is virtually certain to be worth far more in the years ahead." In one of my favorite comments from the letter, Buffett acknowledged that there will always be people with gloomy outlooks for the U.S. economy
Now, this doesn't mean you should simply invest in whatever company is making headlines today and forget about it. It's always important to stay up to date with the current state of all of your stock investments. And not all companies are created equal -- Buffett suggests that investors should stick with a "collection of large, conservatively financed American businesses" for the best chances of long-term success.
Here's the key point: Although Buffett is convinced that investment gains will be substantial, he also says they will be "totally random as to timing."
Big market drops can and almost certainly will happen. As Buffett puts it, "The years ahead will occasionally deliver major market declines -- even panics -- that will affect virtually all stocks. No one can tell you when these traumas will occur."
Buffett wants long-term investors to remember two key points for when the market crashes, or if there's an all-out panic.
To illustrate this point, look at some of the investments Buffett made in the wake of the last market panic -- the financial crisis. As one example, during the worst part of the financial crisis, Buffett decided to invest $5 billion of Berkshire's capital in investment bank Goldman Sachs
In exchange for his $5 billion investment, Buffett received $5 billion worth of preferred stock paying a 10% dividend, as well as warrants to buy 43.5 million common shares of stock by Oct. 1, 2013, with a strike price of $115. By the time the warrants expired, Buffett had made a total return of 62% over five years. He continues to hold shares of Goldman that resulted from the deal and are currently worth more than double the $115 exercise price.
The point is, the best thing you can do if the market crashes in 2017 -- or any other year, for that matter -- is to keep a cool head and remember the ultimate goal -- to buy solid American companies at fair (or downright cheap) prices. And in market crashes, you'll have plenty of opportunities to do just that.
Read more:
25 Canada Square, Level 33, office 50, Canary Wharf London, E14 5LQ +44 20 3608 6256
World Financial Markets - 0700 17 600 Varchev Exchange - 0700 115 44
Varchev Finance Ltd is registered in the FCA (FINANCIAL CONDUCT AUTHORITY) with a passport in the United Kingdom: FCA, United Kingdom - registration number: 494 045, which allows provision of financial services in the United Kingdom.
Varchev Finance Ltd strictly comply with the statutes of the European directive MiFID (Markets in Financial Instruments). targeting increased efficiency, transparency and uniformity of financial instruments.
Varchev Finance Ltd is authorized and regulated by the Financial Supervision Commission - Sofia, Bulgaria: License number RG-03-02-05 / 15.03.2006
The information on this site is not intended for distribution or use by any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.
Disclaimer:
CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 63,41% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work, and whether you can afford to take the high risk of losing your money.