Buffett is Bullish on Stocks but Says the Market Can Drop 50% – Is He Wrong?

Amid a 10-year-plus bull market, many investors can’t come to terms with the idea that there could be a substantial decline in the stock market

by Nigam Arora
Market Watch

Stock market investors are watching the coronavirus spreading far beyond China.

It is no longer mostly in Asia. Italy has reported six coronavirus deaths and an accelerating number of cases. At a time like this, it is nice to see Berkshire Hathaway’s Warren Buffett assuage investors. Buffett‘s advice — don’t buy or sell on the headlines — is especially applicable now.

There is a gem in Buffett’s annual letter, which was released over the weekend, that nobody is talking about. He writes: “Anything can happen to stock prices tomorrow. Occasionally, there will be major drops in the market, perhaps of 50% magnitude or even greater.” He continues that the combination of what he calls “The American Tailwind” and “compounding wonders” will make equities “the much better long-term choice for the individual who does not use borrowed money and who can control his or her emotions. Others? Beware!”

Let’s explore this issue with the help of a chart.

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