Warren Buffett Says This 1 Investing Move Is Key After a Midterm Election. History Says He's Right.
It’s been a rough week for the stock market.
The S&P 500 (^GSPC +0.31%) and Dow Jones Industrial Average (^DJI -0.46%) recently experienced their worst day in over a year. The Nasdaq Composite (^IXIC +1.09%) fared even worse, falling nearly 12% from its October high and entering a technical correction.
Much of the volatility stems from AI stocks, as concerns around their sustainability mount. With Democrats sweeping Congress in this week’s midterm elections, many investors are concerned that stricter regulations may slow the data center build-out and negatively affect stocks spending heavily on AI infrastructure.
While nobody can say where the market is headed in the coming weeks, Warren Buffett has some timeless advice on how political uncertainty should affect your investment strategy.
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How Warren Buffett invests during election years
In Berkshire Hathaway‘s 2018 annual shareholder letter, published in early 2019, Buffett offered some words of wisdom on investing during high-tension political periods.
At the time, the U.S. was in a similar political boat as today. The 2018 midterms had occurred just a few months prior, when Democrats took control of the House of Representatives and ended the Republican trifecta during President Trump’s first term.
Also similar to today, all three major market indexes sank in the week following the elections.
However, Buffett’s advice for investing during politically charged eras is simple: continue buying quality stocks. The market will thrive over time regardless of who is president, and the wisest investors look past volatility and bet on strong businesses.
“Our country’s almost unbelievable prosperity has been gained in a bipartisan manner,” he noted in the Berkshire letter.
“Since 1942, we have had seven Republican presidents and seven Democrats. In the years they served, the country contended at various times with a long period of viral inflation, a 21% prime rate, several controversial and costly wars, the resignation of a president, a pervasive collapse in home values, a paralyzing financial panic and a host of other problems. All engendered scary headlines; all are now history.”
History says Buffett is right
The market’s short-term performance will always be volatile to some degree, but what really matters is how it recovers over time.
While the market was shaky in the days following the 2018 elections, the S&P 500 has soared by more than 200% since then — despite experiencing the COVID-19 crash and 2022 bear market in that time. If you’d invested in an S&P 500 ETF on Election Day 2018, you’d have more than tripled your money by today.
If we’re on the cusp of a bear market, stock prices could plunge yet again. Yet the healthiest companies will not only pull through, but go on to experience lucrative returns over the coming years.
In Berkshire’s 2018 letter, Buffett outlined his and then-business partner Charlie Munger’s investing strategy:
“Charlie and I have no idea as to how stocks will behave next week or next year. Predictions of that sort have never been a part of our activities. Our thinking, rather, is focused on calculating whether a portion of an attractive business is worth more than its market price.”
The best move investors can make right now
Quality stocks with robust underlying fundamentals are the most likely to thrive over time, and loading up on those stocks now can protect your portfolio against even the most severe volatility.
During the dot-com bubble, for example, the companies that fell apart were those with unsustainable business models, weak competitive advantages, or inexperienced leadership teams. But plenty of stocks survived, even if the short term was rocky.
Amazon sank by nearly 95% between 1999 and 2001, for instance. Nvidia crashed by more than 87% in 2002 alone. And Apple lost more than 51% of its value in a single trading day in 2000. Investors who held on to those stocks back then, however, would have built life-changing wealth by today.
NVDA Total Return Level data by YCharts
If history proves just one thing, it’s that buying quality companies with solid fundamentals and then holding those stocks for years (or, ideally, decades) is the most effective way to hedge against volatility.
The market’s short-term performance can be daunting, and if you’re feeling rattled by all the recent turbulence, that’s normal. But with a solid portfolio full of long-term investments, you’ll be well-positioned for whatever may come next.