Warren Buffett’s letter to Berkshire Hathaway investors explains how to use fear to your benefit

Fear is the mind-killer.
Fear is the mind-killer.
Image: AP Photo/Shuji Kajiyama
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Warren Buffett released his annual letter to Berkshire Hathaway shareholders (pdf) today. The 29-page document was full of investment advice and details on the conglomerate’s performance. The billionaire investor—behind Geico, Kraft Heinz, and a slew of other brands—saluted the US’s ”miraculous” achievements, including its “economic dynamism” and ”tide of talented and ambitious immigrants,” in the sprawling missive.

Buffett also recognized that trying times are inevitable—even when the US stock market is experiencing tremendous growth. (He referenced the performance of the Dow-Jones Industrial average, which rose 72% to 19,763 (paywall) from its 1999 closing price to the end of 2016.) And he counseled investors on how to use fear to their advantage:

Many companies, of course, will fall behind, and some will fail. Winnowing of that sort is a product of market dynamism. Moreover, the years ahead will occasionally deliver major market declines—even panics —that will affect virtually all stocks. No one can tell you when these traumas will occur—not me, not Charlie, not economists, not the media. Meg McConnell of the New York Fed aptly described the reality of panics: “We spend a lot of time looking for systemic risk; in truth, however, it tends to find us.”

During such scary periods, you should never forget two things: First, widespread fear is your friend as an investor, because it serves up bargain purchases. Second, personal fear is your enemy. It will also be unwarranted. Investors who avoid high and unnecessary costs and simply sit for an extended period with a collection of large, conservatively-financed American businesses will almost certainly do well.