Warren Buffett Says This Is the 1 Mistake Many Investors Make. Here’s How to Avoid This Common and Costly Error.

Warren Buffett propelled Berkshire Hathaway to six decades of market-beating returns, so it's no surprise that retail investors around the world look to him for advice. The billionaire aims to select quality companies when they're undervalued, then benefit over time as their earnings grow and the stock prices take off. Buffett has invested throughout market environments, from bull markets to bear markets, and has experienced market crashes -- and over time, he's scored a clear win by sticking to his investing principles.

Buffett no longer leads the investing decisions at Berkshire Hathaway -- he handed that role over to his hand-picked successor, Greg Abel, at the start of the year and just this week turned the chairman position over to his son, Howard Buffett. However, Warren Buffett, now chairman emeritus, has continued to speak publicly about investing. And we also may refer to his past words of advice, which continue to ring true today.

In fact, one comment from Buffett looks particularly interesting right now, given certain elements of uncertainty that have weighed on the market recently, from higher inflation to worries about spending on artificial intelligence (AI). Buffett says many investors make this one mistake. Let's find out what it is and consider how to avoid this common -- and costly -- error.

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The S&P 500's performance

First, though, we'll start with a few more words about the current market environment and about Buffett's investing strategy.

The S&P 500 has soared over the past few years and has continued to climb this year, too. But the recent path hasn't been without hurdles. Investors have worried about turmoil in Iran, rising prices in the U.S., and the fast pace of spending by tech giants on the AI build-out. On top of this, in recent days, AI executives have spoken of the subject of AI safety, with Anthropic even advising a slowdown in the advancement of new models.

Meanwhile, stocks remain near record valuation levels, as we can see through the S&P 500 Shiller CAPE ratio, an inflation-adjusted metric that looks at stock prices and earnings.

S&P 500 Shiller CAPE Ratio data by YCharts

Against this backdrop of uncertainties and with stocks trading at high levels, some investors worry that a decline in stock prices may be right around the corner. And this leads me to the subject of Buffett.

The Oracle of Omaha, as he's often called, is known for value investing, and this means he seeks to buy stocks trading for less than what they're actually worth. This is one part of the Buffett technique. On top of that, the billionaire chooses companies with solid competitive advantages and bright long-term prospects as he aims to hold on for a number of years. His position in Coca-Cola is a fantastic example of this: He bought the stock in the late 1980s and has held on ever since.

An error that has to do with price

Now, the mistake many investors make regarding stocks has to do with price, according to Buffett.

"Even though they are going to be net buyers of stocks for many years to come, they are elated when stock prices rise and depressed when they fall," Buffett wrote in his 1997 letter to shareholders. "This reaction makes no sense. Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices."

As a result, these investors, worried about falling prices, may hold back from investing during uncertain or difficult markets. And this means they miss out on getting in on many quality stocks for reasonable or even bargain prices. Even worse, they may panic and sell some of their positions at a loss.

How to avoid this costly mistake? Like Buffett, view declines in stock prices as an opportunity. Buffett will shop for stocks during any market environment, particularly when others are fleeing.

This doesn't mean every stock has what it takes to rebound -- but most quality players do. So, during times of market instability or downturns, don't make this mistake that Buffett has seen very often. Instead, take a close look, individually, at the stocks that have stumbled. Among them, you might find an interesting investment opportunity, one (or more) that could help you significantly along the road to wealth over time.

Adria Cimino has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway. The Motley Fool has a disclosure policy.