One of the most important ideas in investing is that being patient, following a plan, and thinking about the long-term leads to financial success. Warren Buffett has shown this wisdom throughout his 50-year career as the leader of Berkshire Hathaway. As Buffett recently announced his retirement, it’s a good time to look at his investing ideas that work well in today’s market and have proven successful over many years.
Buffett famously said to “be fearful when others are greedy, and greedy when others are fearful.” While calm markets feel better, it’s during difficult times that good opportunities appear. April’s market ups and downs are a good example, caused by concerns about tariffs, rising prices, interest rates, and more. Investors who can look beyond short-term news and focus on their whole investment plan are usually in a better position for the future.
Even though the stock market has recovered most of its losses from earlier this year, prices are still more reasonable than they were in January. These are times when patient investors can benefit from better prices and long-term market trends. Taking a disciplined approach during market swings has historically rewarded those who, like Buffett, ignore short-term market movements and stick to their investment goals. Here are some of Buffett’s principles that can help us understand today’s market conditions.
Market swings have led to better investment prices
“Whether we’re talking about stocks or socks, I like buying quality merchandise when it is marked down.” – Warren Buffett, 2018 Berkshire Hathaway annual letter
A key part of Buffett’s approach is investing in companies when they’re undervalued or priced lower than they should be. While stock market prices rose to very high levels earlier this year, the recent market decline and steady company earnings have brought prices back to more reasonable levels. The S&P 500’s price-to-earnings ratio (which compares stock prices to company profits) is now around 20, which matches its average over the last ten years. This return to normal pricing happened because of short-term worries about tariffs and economic uncertainty, but may also create opportunities for investors.
This is because, over longer periods, these price ratios are the best way to judge if the market is attractively priced. While daily and monthly market moves are often driven by news headlines, company announcements, and world events, these concerns usually fade over time. When looking at years and decades, what matters more is the overall growth trend and whether you paid a fair price when you first invested.
Valuation measures help us know if we’re paying a fair price. Instead of just looking at stock prices alone, valuations tell us what we get for that price – in terms of earnings, company value, cash flow, and dividends. Buying investments when valuations are attractive typically leads to better future returns, while investing when markets seem expensive often results in weaker long-term performance. For this reason, valuations have historically shown a strong connection to long-term investment results.
It’s important to understand that valuations shouldn’t be used to time the market with all-or-nothing decisions. Instead, they’re one important factor in building a good investment portfolio. Understanding current valuation levels can help identify opportunities and set realistic expectations in all market conditions.
Company profits have grown steadily
“Focus on the future productivity of the asset you are considering. If you don’t feel comfortable making a rough estimate of the asset’s future earnings, just forget it and move on.” – Warren Buffett, 2013 Berkshire Hathaway annual letter
Besides more attractive prices, another important reason valuations have improved is the steady growth of company profits. With more than three-quarters of S&P 500 companies having reported their results for the first three months of the year, profits have grown an impressive 12.8%, according to FactSet. This is much better than the 7.2% growth expected at the beginning of reporting season. This positive surprise has been driven by several sectors, particularly Communication Services, Financials, Healthcare, and Information Technology, which continue to increase their profit margins (the difference between what companies earn and what they spend).
In contrast, the Consumer Discretionary (companies selling non-essential products) and Consumer Staples (companies selling everyday necessities) sectors haven’t performed as well. This matches survey data showing consumers are becoming more careful about spending as they focus on necessities during times of rising prices.
Beyond the numbers, company earnings announcements have provided valuable insights into how businesses are handling the current environment. Three key themes have emerged.
First, many companies have adopted a “wait-and-see” approach to the tariff situation. Given limited visibility, some have stopped providing future forecasts, while others have included early tariff estimates in their predictions.
Second, despite short-term uncertainty, plans to invest in growth remain strong, particularly in technology sectors. Major technology companies have maintained or increased their spending plans for 2025, especially in areas related to artificial intelligence. This suggests that company leaders still have confidence in long-term growth opportunities.
Third, companies across various sectors are changing to adapt to new technologies, shifting consumer preferences, and economic changes. These strategic adjustments, while sometimes difficult in the short term, help companies better handle uncertainty and take advantage of new opportunities.
Dividends continue to support investment portfolios
“It’s not good news when any company cuts its dividend dramatically” – Warren Buffett, 2023 Berkshire Hathaway annual meeting
Even though Berkshire Hathaway rarely pays dividends (regular cash payments to shareholders), Buffett has benefited from the earnings and dividend payments of companies he invests in. His teacher, Benjamin Graham, emphasized the importance of dividends as a sign of corporate financial health in the book “The Intelligent Investor.” While investors typically focus on stock prices, dividends have historically been a major contributor to long-term investment returns.
Despite ongoing market uncertainty, dividends have continued to increase, adding to the total return for investors. The accompanying chart shows that many sectors have healthy dividend yields (the annual dividend payment as a percentage of the stock price), many of which are still around their 10-year averages.
For investors who need income from their investments, dividends are an important source of regular payments. Companies are usually reluctant to reduce dividends except during times of serious financial problems. Dividends are also an important signal of a company’s financial health. This is because dividend payments require actual cash, not just accounting numbers. The continued growth in dividends suggests confidence among company leaders despite short-term uncertainties.
The bottom line? As Warren Buffett’s career shows, the best way to handle uncertainty is with a patient, long-term approach to investing. This remains relevant in today’s market environment, especially as investment fundamentals improve.
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