How can we avoid being hurt by stock market fluctuations?

In the past three months, the Dow Jones Index closed for three consecutive negative lines, falling more than 3,800 points. However, Buffett was extremely calm about this. He said at Berkshire's 2025 shareholders' meeting that the decline in the past three months was "not worth mentioning".

On the one hand, this mentality is because Buffett is knowledgeable and has experienced many stock market crashes such as the stock market crash from 1973 to 1975, the stock market crash in 1987, and the subprime mortgage crisis in 2008. However, these large fluctuations cannot cause substantial damage to his investment.

On the other hand, it is because Buffett is well aware of the nature of investment. What is the essence of investment? The well-known investor Duan Yongping once said, "Buying stocks is buying a company", which is the wisest thing he learned from Buffett; and Buffett himself also said that this is the wisdom he got from his teacher Graham, and it is this that changed Buffett's investment. Before coming into contact with Graham's "Smart Investors", Buffett also tried to invest by drawing K-line charts and capturing news.

"The investment that is most like doing business is the wisest investment." This is the most helpful sentence Buffett got from his mentor Graham, and it is also an important reason why Buffett is not afraid of stock market fluctuations. The following are two investment stories that Buffett personally experienced, which were cited by Buffett to clarify the nature of investment. In these two stories, even if the stock market is closed, it will not hurt Buffett's investment.

Story 1: Farm Investment

In a letter to shareholders in 2013, Buffett told a story like this:

The story takes place in Nebraska, USA. From 1973 to 1981, the Midwest of the United States experienced a surge in farm prices, due to widespread expectations of out-of-control inflation and then the loan policies of small village banks fueled the fire. But as the bubble burst, farm prices plummeted by 50%, seriously hurting farmers with higher leverage levels and their creditors. After that bubble, Iowa and Nebraska collapsed five times the number of banks that had collapsed in the last Great Depression.

In 1986, Buffett purchased a 400-acre farm from the Federal Deposit Insurance Company, located 50 miles north of Omaha. Buffett spent $280,000, much less money than the bank that broke down loaned the farm a few years ago. He knew nothing about farm management, but he had a son who loved agriculture. Buffett learned from his son how much corn and soybeans the farm can produce and how much it costs to operate. Based on these estimates, Buffett calculated that the farm's normalized return rate was about 10% at that time. Buffett believes that over time, productivity will increase and crop prices will also rise.

Buffett believes that no unusual knowledge or wisdom is needed to conclude that this investment has no risk and is likely to have a great return. Of course, sometimes crop harvests are not good, and prices are sometimes disappointing. But so what? Similarly, there will be very good years, and Buffett will never be forced to sell the farm due to financial pressure. Now, 28 years have passed, the farm’s profit is three times the initial, and the value is five times or more than the initial investment. Buffett still knew nothing about agriculture and visited the farm for the second time.

Story 2: Property Investment

In 1993, Buffett made another small investment.

When Buffett was CEO of Solomon, his landlord Larry Silverstein told him there was a retail property near New York University and the Restructuring Trust (RTC) was planning to sell. Again, this is another bubble burst—the bubble of commercial real estate, so the government set up RTC to deal with assets owned by bankrupt savings institutions that fueled stupid behavior under the optimistic and loose lending policy at the time.

The analysis of this investment is also very simple. Like the farm, the property currently generates a 10% return without leverage. However, the property is not well managed under RTC's management, and its revenue will increase after several vacant stores are leased. Importantly, the largest tenants—tenants that make up 20% of the entire property’s rentable area, pay only about $5 per square foot, while the average rent for other tenants is $70 per square foot. This cheap lease will expire in nine years, which will surely bring a significant increase in profits. The property is also very good (near New York University).

Buffett bought the property with several of his friends. A friend of Buffett is an experienced high-level real estate investor, and this friend and his family will manage the property. As the old lease expires, the profits rise to 3 times the previous one. The dividend distribution every year now exceeds 35% of Buffett’s initial investment. In addition, Buffett and his friends' initial mortgages were refinancing twice in 1996 and 1999, respectively, which resulted in several special dividend distributions, totaling more than 150% of their initial investment. Buffett hadn't visited the property before the 2013 shareholders' meeting.

The basic principles of investment

Buffett believes that revenues may grow in the coming decades, whether it is a farm or a retail property near New York University. While the growth will not be crazy, these two investments will be a solid and satisfying investment that Buffett can hold throughout his life and his descendants.

Buffett told these stories to illustrate some of the truth about investment:

You don't need to be an expert to get a satisfactory return on investment. But if you are not, you must recognize your limitations and follow a path that will certainly be reasonable and effective. Keep it simple and don't pull out the seedlings to encourage growth. Reject quickly when someone promises to make you profit quickly.

Focus on the future productivity of the assets you are looking at. If you find it difficult to make a rough estimate of the future profits of your assets, then give up and keep moving forward. No one has the ability to evaluate every investment opportunity. It is not necessary to know everything. You just need to understand the actions you have taken.

Buffett is not afraid of stock market fluctuations because he regards buying stocks as an industrial investment, and the stock market just provides an opportunity to discover wrong pricing. Just like farm investment and property investment, dividends and rents provide good enough returns, the fluctuations in stock market quotes can be ignored, or the wrong pricing of the market can be used to sell high and buy low. But if investors are intimidated or tempted by market quotes and ignore the company's profitability, investors will suffer deeply.

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