Warren Buffett Has 1 Simple Rule for Investing During Bear Markets. History Says He's Right.

Warren Buffett picked a tough time to tell people to buy stocks. On Oct. 16, 2008, with the financial crisis in full swing, he wrote his famous op-ed in The New York Times, “Buy American. I Am.” In it, he announced that he was buying stocks again.

Unfortunately, that call came way too early in the bear market. From the time this piece was published to the March 2009 low, the S&P 500 (^GSPC +0.54%) fell by more than 30%. It was one of the few times in his career where investors thought he might have finally lost his magic touch. While the timing of his buying proved to be incorrect, there were a couple of Buffett principles that proved to be right.

The one rule that works during bear markets

It’s easy to look at the 30% loss figure from this example and presume that this trade was a disaster. But it wasn’t completely. In fact, history would go on to show that it eventually became a really good trade.

The reason is that by October 2008 when Buffett announced that he was buying U.S. stocks again, the S&P 500 was already down roughly 40% from its high. He was actually fulfilling one of his other investing tenets: “Be fearful when others are greedy, and be greedy when others are fearful.”

Many investors had long since abandoned their equity positions and moved into cash. With the entire U.S. economy looking like it was on the brink of collapse, there was little demand for stocks while prices were still falling.

But Buffett viewed it as an opportunity to buy stocks at discounted prices. He finally found value after the S&P 500 fell by 40% and acted on it. He didn’t care what anybody else in the market was doing. His investing process told him that it was time to buy — which is one of Buffett’s key investing principles: Keep investing even when short-term conditions turn rough.

That means continuing to make monthly periodic investment plan contributions into brokerage accounts and 401(k)‘s. It also means putting the process on autopilot so you don’t accidentally miss an investment or are tempted to avoid it because stock prices are down.

The benefits of buying low

Imagine a scenario where someone invested right at the market peak before the financial crisis. But they held on throughout the bear market and rode it out all the way back to its previous high. Granted, that would have been a six-year journey from start to finish. But a full round trip would have resulted in a total return of 0%.

Now imagine that person continuing to make monthly investments from the pre-crisis peak in late 2007 to the new high in early 2014. They would have spent over six years picking up additional shares at prices below their previous highs. At the bottom in March 2009, they would have bought at nearly 60% less than the price a year and a half earlier. That’s a heck of a deal!

Any initial investment made at the pre-crisis peak would have earned a 0% return, just as in the example above. But all of those incremental purchases along the way would have produced a positive return once the S&P 500 finally got back to its previous high. Buying as share prices are falling or well below their previous high can actually enhance your portfolio’s long-term returns. Bear markets are essentially sales that don’t get advertised.

Your plan before the next bear market

In his op-ed, Buffett explained that he wasn’t trying to pick the market’s low. He was simply trying to invest at the point where the value was attractive enough to invest.

That’s good advice to heed. You’ll drive yourself nuts trying to find the absolute market bottom. And there’s a good chance that stocks will keep falling after you buy. But if you find requisite value at some point, it’s a good enough time to buy. And just as Buffett found out, the long-term boost to your returns can be substantial.

Keep investing during those bear markets. So many people are tempted to run to the sidelines when conditions get bad. In most cases, those are the best times to pick up shares on sale. Keep your focus on your long-term goals and take advantage of the sales along the way!