Warren Buffett: Two things to remember during scary periods

“The years ahead will occasionally deliver major market declines – even panics – that will affect virtually all stocks,” Warren Buffett said in his FY2016 letter to Berkshire Hathaway shareholders.

“No one can tell you when these traumas will occur – not me, not Charlie, not economists, not the media. Meg McConnell of the New York Fed aptly described the reality of panics: “We spend a lot of time looking for systemic risk; in truth, however, it tends to find us,”” said Mr Buffett.

What should investors do during such scary periods?

“…you should never forget two things: First, widespread fear is your friend as an investor, because it serves up bargain purchases. Second, personal fear is your enemy. It will also be unwarranted. Investors who avoid high and unnecessary costs and simply sit for an extended period with a collection of large, conservatively-financed American businesses will almost certainly do well,” said Mr Buffett, who is chairman and CEO of Berkshire Hathaway.

Mr Buffett started his thought on this subject by saying: “America’s economic achievements have led to staggering profits for stockholders. During the 20th century the Dow-Jones Industrials advanced from 66 to 11,497, a 17,320% capital gain that was materially boosted by steadily increasing dividends. The trend continues: By yearend 2016, the index had advanced a further 72%, to 19,763.

” American business – and consequently a basket of stocks – is virtually certain to be worth far more in the years ahead. Innovation, productivity gains, entrepreneurial spirit and an abundance of capital will see to that.”

Taking a dig at naysayers, Mr Buffett said: “Ever-present naysayers may prosper by marketing their gloomy forecasts. But heaven help them if they act on the nonsense they peddle. ”

Then driving home a point about reality, Mr Buffett said: “Many companies, of course, will fall behind, and some will fail. Winnowing of that sort is a product of market dynamism. Moreover, the years ahead will occasionally deliver major market declines – even panics – that will affect virtually all stocks. ”

Mr Buffett went on to talk about the two things that investors should not forget during such scary periods.