Warren Buffett once warned you ‘shouldn’t own stocks at all’ if you do ‘dumb things’ whenever they go down — 2 ways to profit from panic instead of getting crushed by it

Buffett’s simple test — and the assets that pass with flying colors

In a 2018 interview with Yahoo Finance, Buffett explained that there are two types of things people buy: one qualifies as a real investment — the other, not so much.

The test to tell the difference is simple: If trading were banned for a period of time, would the asset still hold up?

“If you buy something — a farm, an apartment, house or an interest in a business — and look to the asset itself to determine whether you’ve done something — what the farm produces, what the business earns, and so on — you don’t really care whether the stock market’s open,” Buffett said. “You look at the investment itself to deliver the return to you.”

Simply put, the kinds of assets Buffett sees as real investments produce returns on their own. They don’t need an open market — or a future buyer — to be worthwhile.

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Rental real estate

Buffett has often pointed to real estate — especially rental properties — as a textbook example of a productive, income-generating investment.

In 2022, Buffett remarked that if you offered him “1% of all the apartment houses in the country” for $25 billion, he would “write you a check.”

Why? Because regardless of what’s happening in the broader economy, people still need a place to live and apartments can consistently produce rent money.

‘Interest in a business’ — and Buffett’s favorite investment for everyday Canadians

Buffett says that when you buy an “interest in a business” and focus on what the business earns — rather than daily market moves — “you don’t really care whether the stock market’s open.” And it’s no surprise he feels that way.

His company, Berkshire Hathaway, has delivered staggering returns over the decades — through bull and bear markets — by owning stakes in high-quality, cash-generating businesses.

But of course, not all businesses are created equal — so how do you pick the right ones?

Buffett’s solution is refreshingly simple: own an S&P 500 index fund. These funds offer broad exposure to the S&P 500 — the top companies listed on U.S. stock exchanges.

Such a straightforward approach gives investors instant diversification without the need for constant monitoring or active trading.

“In my view, for most people, the best thing to do is own the S&P 500 index fund,” Buffett famously stated.

Sources

1. CNBC: Warren Buffett: Some People Should Not Own Stocks (Feb 26, 2018)

2. Yahoo Finance: How Warren Buffett decides if something is a good investment (Feb 11, 2019)

2. CNBC: Warren Buffett gives his most expansive explanation for why he doesn’t believe in bitcoin (April 30, 2022)