It looks as if the decade-long bull market in stocks is coming to an end. Since the beginning of October, the S&P 500 has dropped more than 16%, bringing it close to the 20% decline generally considered to be the marker of a correction.
At this point, we don't know whether or not the index will make a recovery or continue to slide in 2019. However, what we do know is that it is impossible to tell what's in store for stocks in the new year. It does seem as if the path of least resistance at the moment is down.
At times like these, I think it is essential to go back and re-read the advice of Benjamin Graham and Warren Buffett (Trades, Portfolio).
Advice from the masters
Investing in a bull market is relatively simple: All you need to do is buy stocks and watch them go up. However, it is investors' performance in uncertain markets that really separates the best investors from the worst. Over the years, Warren Buffett (Trades, Portfolio) has built on Benjamin Graham's timeless advice for investors in bear markets. In his 2017 letter to investors of Berkshire Hathaway, the Oracle of Omaha warned readers that it would only be a matter of time before the next bear market arrives, and this is something all investors should be prepared for.
"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. 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."
He went on to say that when stocks do inevitably start to slide, there are only two things investors should remember. Here is the full quote:
"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."
He goes on to say, "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."
Be greedy when others are fearful
At the time of writing, some of the most sought-after stocks of the past five years are trading significantly below their 52-week highs. Online streaming service Netflix and retailer Amazon, for example, are closing in on a near 40% decline from their all-time highs -- that's a substantial drop for stocks that have gone nowhere but up over the past few years.
Tech stocks are not the only one suffering in the current environment. A large percentage of S&P 500 constituents are trading at, or close to 52-week lows. This environment is perfect for value investors.
Indeed, we know that Warren Buffett (Trades, Portfolio) spent over $10 billion of Berkshire Hathaway's cash in the third quarter, buying stocks to add to his portfolio, and with most of the investments he made back then trading lower today, it is almost certain that he is still buying today.
At the beginning of this article, I said that I like to re-read Buffett and Graham's advice in times of market turbulence. The above explains why. Buffett's advice on being greedy is timeless, and his actions only reinforce his advice. Now is the time to follow the Oracle of Omaha and be greedy while others are fearful, take advantage of investors' emotional selling and ignore your own fear.
Disclosure: The author owns shares in Berkshire Hathaway.
