Worried That the Stock Market Is About to Crash? You Should Listen to What Warren Buffett Has to Say

Stock markets around the world have been on the rise.

In the US, a widely-followed market barometer, the Dow Jones Industrial Average, climbed above the 20,000 mark for the first time ever in January. At home, the SPDR STI ETF (SGX: ES3) – a proxy for Singapore’s market barometer, the Straits Times Index (SGX: ^STI) – has risen almost 22% since hitting a low in mid-February last year.

The rise in stock prices can be both exciting and scary at the same time. To some, a rapid rise is a sign that the market is poised for a crash.

The Oracle of Omaha speaks

In his latest annual report, multi-billionaire Warren Buffett, an investor with a phenomenal multi-decade track record of investing success, shared some thoughts about market declines. He wrote:

“Moreover, the years ahead will occasionally deliver major market declines – even panics – that will affect virtually all stocks.”

Buffett sets the expectations here. Market declines can affect all stocks. However, he was also quick to add (emphasis is mine):

“No one can tell you when these traumas will occur – not me, not Charlie [his business partner], not economists, not the media. Well, I would say they don’t know, and I don’t know.”

Historically, stock markets have declined from time to time. In the 22 years stretching from  1993 to 2014, the Straits Times Index has suffered yearly peak-to-trough declines  of 20% or more in nine years.

But knowing that declines will happen in the future and predicting when stocks will fall are two very, very different things. Buffett has made it clear that no one will know for sure when stocks will decline.  

Instead of worrying over when the next downturn will come, Buffett implied that we should be thinking about how to get ready when it happens. In his own words, he wrote:  

“Every decade or so, dark clouds will fill the economic skies, and they will briefly rain gold. When downpours of that sort occur, it’s imperative that we rush outdoors carrying washtubs, not teaspoons.”

Future declines often look like risks. But declines in the past have been opportunities to pick up shares of good companies on the cheap. Or as the tweet below from Morgan Housel says:

Investors would do well to listen to what Buffett has shared.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chin Hui Leong doesn’t own shares in any companies mentioned.