Last year was a nightmare for many investors. The stock market collapsed under economic pressure as inflation reached a 40-year high, and the Federal Reserve raised interest rates at the fastest pace since the early 1980s. In fact, all three major U.S. stock market indexes had their worst year since the financial crisis in 2008. The Dow Jones Industrial Average dropped 9%, the S&P 500 slipped 19%, and the Nasdaq Composite plunged 33%.
Yet the hardest part is the lingering sense of uncertainty. Inflation is still running near a 40-year high, and central bank officials expect it to remain elevated through 2025. Meanwhile, the Federal Reserve has raised its benchmark interest rate to a 15-year high, and officials expect rates to continue climbing in 2023. That means the headwinds that triggered the stock market meltdown have not disappeared.
Is now a good time to buy stocks? Consider this advice from Warren Buffett.
The best time to invest in the stock market
In 2018, Buffett offered the following insight during a CNBC interview: “The best chance to deploy capital is when things are going down.” At the time, he was discussing the benefits of opportunistic share buybacks compared to regular dividend payments, but that comment echoes other advice Buffett has given regarding the broader stock market.
In his 2016 letter to shareholders, Buffett opined, “Widespread fear is your friend as an investor, because it serves up bargain purchases.” That is the silver lining to every downturn, and those words fit the current economic environment perfectly. Uncertainty surrounding high inflation and rising interest rates has scared many investors out of the stock market. Maybe they have given up on investing, or maybe they plan to buy back into the market when conditions improve. Either way, they are making a costly mistake.
Right now, the market is full of beaten-down stocks that are brimming with future potential, and that creates an excellent buying opportunity for patient investors, whether or not the market rebounds in the near term.
The most important quality an investor can possess
One of Buffett’s best-known quotes comes from an op-ed piece written for The New York Times: “A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful.” That famous statement is made all the more noteworthy by the timing of the article. Buffett wrote those words as the financial world was devolving into chaos amid the Great Recession, and the S&P 500 was down nearly 40% when the article was published.
So what? It’s easy to keep calm when stocks are rising, but investors must learn to maintain the same steely resolve when prices are falling. In fact, Buffett once said, “The most important quality for an investor is temperament, not intellect.”
One of the best ways to battle inflation
During a CNBC interview, Buffett said buying shares in “a wonderful business” is one of the best ways to battle inflation. He used Coca-Cola as an example, explaining that people will continue to buy soda over time with little concern for rising prices. Of course, inflation might create a temporary headwind to consumer spending, but demand will inevitably rebound when economic conditions improve.
That advice can be applied more broadly to any business with products that inspire consistent demand, and virtually all of the stocks Buffett owns fit that mold.