Stocks falling? Warren Buffett says do this instead of panicking

Since 1965, shares of Warren Buffett’s conglomerate, Berkshire Hathaway (BRK.B), have generated a compound annual return of 19.9% ​​— nearly double what the S&P 500 achieved over the same period. Unlike many famous money managers on Wall Street, Buffett thrived during market crashes by taking a straightforward approach that any investor could follow: buying high-quality companies at discounted prices when others were selling in panic.

Below, we analyze the principles that have kept Buffett successful through several market crashes.

Principle 1: Stay calm and avoid panic selling

Buffett often asserts that “the stock market is designed to transfer money from activist to patient.” He warns against making emotional decisions during periods of market downturn, noting that selling due to fear often leads to significant losses.

A look at the long-term performance of the S&P 500 proves his point — despite countless selloffs, recessions, and geopolitical crises, a $100 investment in 1928 would be worth more than $982,000 today.

Principle 2: “Be fearful when others are greedy, and only be greedy when others are fearful.”

One of Buffett’s most famous and often repeated sayings is: “Be fearful when others are greedy, and only be greedy when others are fearful.” This is not just a clever play on words, it is the backbone of his wealth-building strategy.

While most investors seek to exit during market crashes, Buffett is looking for his checkbook. During the 2008 financial crisis, when banking stocks were in free fall and many expected the financial system to collapse, Buffett invested $5 billion in Goldman Sachs Group, Inc. (GS). The deal included preferred stock with a 10% dividend yield and warrants to purchase common stock, ultimately generating profits for Berkshire Hathaway of more than $3 billion.

Principle Three: Focus on business fundamentals

Buffett has a simple test for a market downturn: Would a 30% drop in stock price change the number of Coke people will drink in the next year? Does this affect the number of people who will use their American Express cards? If the answer is no, the intrinsic value remains intact despite the market’s temporary opinion.

Berkshire Hathaway investment in The Washington Post demonstrates this approach. In 1973, during a sharp market downturn, Buffett bought stocks for only 25% of what he calculated as their intrinsic value. The price fell further after that, but Buffett was not deterred – he understood that the fundamental strength of a company was not reflected in its stock price. His patience paid off: Berkshire’s $10.6 million investment swelled to more than $200 million by 1985, a return of nearly 1,900%. This wasn’t investment magic, Buffett was aware that fearful markets often misprice great companies.

Principle 4: Do not time the market

Buffett discourages trying to predict market movements, calling it a fool’s game, and instead holds for the (very) long term. Once again, Buffett put his money where his mouth was, holding Coca-Cola stock for 36 years and American Express stock since the 1960s.

Principle 5: Keep cash reserves for opportunities

While most financial advisors recommend staying fully invested, Buffett views cash differently — not as something that doesn’t earn interest or dividends in a bank account, but as a “financial ammunition” when rare possibilities arise.

Berkshire’s massive cash position — often criticized during bull markets — turns from a liability into Buffett’s secret weapon during crashes. In 2010, after handing out billions during the financial crisis, Buffett formalized this strategy in his letter to shareholders, pledging to maintain at least $10 billion in cash reserves (although typically holding around $20 billion). This was not excessive caution, but rather strategic preparation for the next inevitable market panic.

In mid-2020, with markets tense, Buffett is once again holding a record cash hoard.

Buffett’s philosophy emphasizes the importance of staying rational, focusing on fundamentals, and seeing market declines as opportunities rather than setbacks.