Beginner’s Guide to Market Volatility

Warren Buffett: The long-term success of US stocks is 'very easy to predict'

Warren Buffett.
David A. Grogan | CNBC

Legendary investor Warren Buffett has been investing in stocks for nearly eight decades, during which time the S&P 500 has endured 88 declines about as bad as Monday's 3.4% slump. And after each one, the market eventually rebounded.

While the chairman of Berkshire Hathaway doesn't think "there's any way to predict" what the market will do in the short term — as in, over a matter of days or months — he's quite confident in his ability to predict what's going to happen over the span of a decade or more.

"I can come to a pretty firm conclusion that 20 or 30 years from now, American business — and probably all over the world — will be far better than it is now," Buffett said Monday in an interview with CNBC's Becky Quick on "Squawk Box." "The long term is very — in my view — is very easy to predict in the general way."

Here are three takeaways from Buffett's interview with CNBC and his annual letter to Berkshire Hathaway investors, which published over the weekend.

'There's always trouble coming,' but keep perspective

The market's latest bout of turbulence stems from uncertainty surrounding the deadly coronavirus, and specifically whether it could hamper global economic growth. While Buffett calls this latest news "scary stuff," he says it shouldn't affect how you invest.

He should know. Buffett has invested in the market during times of war and peace, during bull and bear markets, and with 14 different U.S. presidents at the helm. He's seen some of the market's worst crashes.

"There's always trouble coming," Buffett says. Even during some of the market's worst periods, however, like 2008 in the midst of the financial crisis, his advice was: "Buy stocks."

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"There's always gonna be some news, good or bad, every day. In fact, if you go back and read all the papers for the last 50 years, probably most of the headlines tend to be bad," Buffett told CNBC this week. "But if you look at what happens to the economy, most of the things [that] happen are extremely good. I mean, it's incredible what will happen over time."

Rather than fearing these periods of market bumpiness, Buffett says long-term investors should embrace them: "It gives you a chance to buy something that you like, and you can buy it even cheaper."

'Stocks work out better than bonds most of the time'

Since Buffett began investing in the 1940s, the S&P 500 has experienced 12 bear markets, or periods when this benchmark fell at least 20% from a recent high, according to data compiled by Yardeni Research. The worst of those, from 2007 to 2009, saw this index tumble nearly 57%.

Even so, Buffett believes investors are better off investing in stocks, rather than in bonds, which are relatively safer but offer a lower return.

"Anything can happen to stock prices tomorrow," Buffett wrote in his annual shareholder letter to investors. Thanks to a combination of what he calls "The American Tailwind" and compounding interest, Buffett says that "will make equities the much better long-term choice for the individual who does not use borrowed money and who can control his or her emotions."

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What's more, Buffett added in his interview with CNBC: "A good idea works and it works and it works. Stocks work out better than bonds most of the time."

Still, he recommends that investors buy stocks because they believe in the business. "People would be better off if they say, 'I bought a business today,' not a stock today, because that gives you a different perspective."

For Buffett, that means buying shares of businesses that he believes in, and then holding on to those investments for decades. Berkshire Hathaway has invested in American Express for more than 20 years and Coca-Cola for 40 years, he says.

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A market decline isn't 'bad news unless you have to sell'

In addition to embracing market declines as a buying opportunity, Buffett says it's important to be mindful that a vast majority of investors aren't actually worse off as a result. "How can it be bad news unless you have to sell stocks?" he said in his interview with CNBC. "Now, if you have to sell 'em for some reason, you're worse off."

On days like Monday, with the S&P 500 tumbling more than 3%, Buffett says his company "certainly won't be selling," though it "could easily be buying something."

That's why instead of focusing on the decline in the value of your portfolio on the days surrounding big market slumps, you're better off focusing on your long-term strategy and deciding if there's reason to invest more.

"If you like to own American businesses, you're getting a chance to buy it 3% cheaper," he says.

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