Though market indices ticked higher on Friday, last week was fairly tough on investors. The tech-heavy Nasdaq Composite, in particular, was hit hard. The market index fell nearly 5%, highlighting investors' skittish attitude toward tech companies following a tech-led bull market after the coronavirus market crash early last year.
A sharp pullback like this prompts a timely question for investors: Is this a sign of more declines to come? Or is this a good time to buy stocks?
Image source: Getty Images.
Taking a page from Warren Buffett's playbook
Before we attempt to answer whether now is a good time to buy stocks or not, investors should first understand that attempting to "time" the market, or predict where it is headed next, is not a smart way to go about investing. Not only has the market historically proven extremely unpredictable, but attempting to do so distracts investors from the point of investing: to identify undervalued companies and profit from potential share price appreciation over the long haul.
Take it from famed investor Warren Buffet:
Another famous investor, Peter Lynch, went as far as to warn about the perils of marketing timing, implying that it will lead to portfolio losses. "Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves, " he has said.
Both of these investors have done quite well for themselves, giving credibility to their advice and their underlying investment strategies. Fidelity's Magellan Fund achieved one of the greatest 13-year investment streaks of all time when Lynch oversaw its holdings. Shares of Buffett's Berkshire Hathaway, the Oracle of Omaha's conglomerate for buying stocks and subsidiaries, have compounded at an average rate of 20% between 1965 and the end of 2020, more than doubling the S&P 500's compound annual average growth rate of 10.2% (including dividends) over this same timeframe.
It's best we follow Buffett and Lynch's example and avoid trying to guess where stocks are headed in the coming weeks, months, quarters -- or even few years. Instead, investors should simply look for good investments to buy. Finding high-quality businesses at good prices and having the courage to buy and hold them is hard enough. Don't add another layer of complexity to your strategy by trying to time the market.
If Buffett isn't smart enough to time the market, the average investor probably isn't either.
Warren Buffett. Image source: The Motley Fool.
So what can we do?
Eliminating market timing from your strategy doesn't mean you can't make timely purchases of stocks. Buffett, for instance, recently increased the amount he was spending on repurchases of Berkshire stock when the stock was trading lower. This isn't market timing. It's just being opportunistic.
Likewise, many stocks fell even more sharply than the NASDAQ last week, making already attractive companies even more compelling investments. Consider, for instance, the decline in stock prices for Apple and NVIDIA last week. Shares of these two companies fell about 7% and 8%, respectively. Yet there's no reason to believe these businesses became materially worse over just a handful of days, yet their share prices fell sharply. It could be a good time to consider buying into some great companies like these tech stocks.
In general, investors should continue buying stocks in a market like this. If anything, it's now a better time to buy stocks than it was earlier this week -- not because stocks are likely to go up in the near-term but instead simply because the long-term expected return on an asset is greater if you can buy it at a lower price than at a higher price. Intuitively, this makes sense: if you were already interested in certain stocks at higher prices, they should technically be more attractive at lower prices. After all, they're now trading at a discount relative to their previous prices.
Over time horizons of greater than five years, buying a quality company at an attractive price today will likely reward investors well. The longer your time horizon, the more the "American tailwind," as Buffett has referred to the United States' capitalism, has time to work its magic. And this tailwind has notably prevailed over the long haul despite recessions, depressions, and even world wars. Its resilience has been demonstrated more recently as well, with Buffett remaining optimistic about the economy. Consider this quote from Buffett's annual Berkshire Hathaway shareholder letter, which was released yesterday:
Despite some severe interruptions, our country's economic progress has been breathtaking. Our unwavering conclusion: Never bet against America.
So, should you buy stocks right now? For investors willing to stay invested for the long haul, it's likely a good idea. Instead of overthinking where the market is headed, spend that energy looking for good opportunities.
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Daniel Sparks has no position in any of the stocks mentioned. His clients may own shares of the companies mentioned. The Motley Fool owns shares of and recommends Apple, Berkshire Hathaway (B shares), and NVIDIA and recommends the following options: short January 2023 $200 puts on Berkshire Hathaway (B shares), short March 2021 $225 calls on Berkshire Hathaway (B shares), and long January 2023 $200 calls on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.