Warren Buffett's Advice for Investing in a New Bull Market

Happy days are here again. Maybe. Hopefully.

The S&P 500 is up close to 16% above its previous low set on Oct. 12, 2022. To reach the commonly accepted threshold for a new bull market, it only needs to rise another 4% or so.

What’s the best strategy for investors if stocks indeed keep the current momentum going? Paying attention to what Warren Buffett has to say should help. The legendary investor has experienced his fair share of up and down markets and achieved tremendous long-term success. Here’s Buffett’s advice for investing in a new bull market.

Warren Buffett standing in front of microphones.

Image source: The Motley Fool.

Be fearful?

Some might think that Buffett would urge investors to be very cautious in a new bull market. After all, he famously stated in a 2008 New York Times opinion article: “A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful.”

However, most people completely ignore what Buffett wrote in the same paragraph: “But fears regarding the long-term prosperity of the nation’s many sound companies make no sense.” He maintained that “most major companies will be setting new profit records 5, 10, and 20 years from now.” That prediction has already been proven to be accurate on the five-year and 10-year periods.

The greed that Buffett referred to is most evident closer to the end of a bull market than at the beginning. Although the great investor likes the opportunities that bear markets present, it’s a pretty safe bet that he’s continuing to buy stocks for Berkshire Hathaway‘s (BRK.A -1.14%) (BRK.B -1.07%) portfolio even with the possibility of a new bull market right around the corner.

Stick to the basics

Actually, Buffett would almost certainly tell you to ignore what the stock market is doing in 2023. In his 2013 letter to Berkshire Hathaway shareholders, he warned against making investment decisions based on the “chatter about markets, the economy, interest rates, price behavior of stocks, etc.” 

So what would Buffett’s advice be in a new bull market? Stick to the basics. He wrote to Berkshire shareholders in 2010 (still in the early stages of the longest bull market in history), “In the end, what counts in investing is what you pay for a business — through the purchase of a small piece of it in the stock market — and what that business earns in the succeeding decade or two.” 

There are two important lessons for investors in that statement. First, focus on the valuations of the stocks you buy. Attractive valuations hinge on two things: the price you pay for a stock and its projected earnings.

You might be tempted as a new bull market takes off to invest in stocks of companies for which you don’t understand the underlying businesses. Don’t succumb to the “fear of missing out” (FOMO) phenomenon. Buffett wrote in 2010 that he and his longtime business partner Charlie Munger “avoid businesses whose futures we can’t evaluate, no matter how exciting their products may be.” 

The second key lesson from Buffett’s statement is to focus on the long term. Note that he said to look at what a business can earn over the next one-to-two decades. That’s not easy to do. However, if you at least try to make a reasonable valuation of earnings it should improve your chances of success. 

Evergreen wisdom

You might have noticed that Buffett’s investing advice doesn’t just apply to new bull markets. It’s just as relevant later in bull markets or in bear markets. That’s not surprising.

Buffett would be the first to tell you that he can’t predict what the stock market will do over the short term. In that 2008 New York Times article, he wrote, “I haven’t the faintest idea as to whether stocks will be higher or lower a month or a year from now.”

But if you follow his advice, you don’t have to be concerned about bull or bear markets. With Buffett’s approach, happy days should be on the way eventually regardless of what the overall stock market does.

Keith Speights has positions in Berkshire Hathaway. The Motley Fool has positions in and recommends Berkshire Hathaway. The Motley Fool recommends the following options: long January 2023 $200 calls on Berkshire Hathaway, short January 2023 $200 puts on Berkshire Hathaway, and short January 2023 $265 calls on Berkshire Hathaway. The Motley Fool has a disclosure policy.