Warren Buffett Just Taught Us How to Manage Through a Bear Market. Here's the Lesson.

Uncertainty has been the name of the game for stock and bond market investors this year. Trade policy, changing tariff plans, anticipated Federal Reserve moves, and questions about ongoing economic growth have created fear among market watchers.

These can be hazardous times for your financial health. They don't need to be, though. In fact, if played correctly, down markets can be springboards for future gains and outperformance.

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Most market followers know Warren Buffett is a master investor. So why not look to him for advice right now? Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B) has made a big portfolio change in recent months. That now looks like a masterful move, and there are lessons here for all investors.

Buffett adjusted his portfolio late last year, and it now looks brilliant. Image source: The Motley Fool.

Think like Warren Buffett

One of the most famous quotes about market fear came from Berkshire CEO Buffett. It was in his 1986 shareholder letter, when the markets were in the midst of a multi-year bull market. Buffett wrote, "Our goal is more modest: we simply attempt to be fearful when others are greedy and to be greedy only when others are fearful."

So things were good in 1986. Yet Buffett didn't pour his available funds into a rising stock market. He also told investors this in that year's shareholder letter:

Our main capital allocation moves in 1986 were to pay off debt and stockpile funds. Neither is a fate worse than death, but they do not inspire us to do handsprings either.

That's a good playbook that every investor can follow. Raise some cash, pay down debt, and be patient during strong market periods. With the S&P 500 index soaring by more than 20% in 2023 and 2024, let's look at what Buffett was doing in some detail.

Berkshire's record cash pile

Berkshire was holding a record $348 billion in cash as of the end of the first quarter. Much of that cash was accumulated last year. Let's look at how Buffett's company got here. It's particularly relevant since Buffett would rather hold stocks than cash. In the 2024 shareholder letter, Buffett wrote, "Berkshire will never prefer ownership of cash-equivalent assets over the ownership of good businesses, whether controlled or only partially owned."

Yet in times of uncertainty like these, investors might feel safer in cash. Buffett clearly had a plan to raise more over the last 18 months. He did it by selling shares in one of his favorite stocks. The table below shows how his holding of Apple stock was gradually reduced.

Data source: SEC filings.

It's a great example of Buffett putting his money where his mouth is, almost 40 years later. I don't think Buffett fears market downturns, but he was certainly being careful when others were greedy. Yet he didn't sell out of a name he loves. He significantly reduced Berkshire's Apple holding from over 900 million shares to just 300 million. But it remains one of his largest holdings at 28% of Berkshire's equity portfolio.

Lessons to be learned

The first takeaway for retail investors is that decisions don't have to be made quickly, nor action taken all at once. Buffett spent more than a year adjusting his allocation of Apple stock. That may be more time than others need, but one good rule of thumb is to buy or sell in thirds. That way you don't have to stress about the timing of your transaction if the market doesn't go your way in the short term.

Another is that one shouldn't be too overweight in any stock, even one you feel is sound and safe. A 50% allocation may just have been too much of one name for Buffett and his team. A 28% weighting is still very meaningful to Berkshire's equity portfolio.

Buffett's move makes it clear that he can be patient holding investable cash. At the 2025 shareholder meeting, he noted that Berkshire has "made a lot of money by not wanting to be fully invested at all times." The result, at least in the short term, has been Berkshire stock outpacing the major index thus far in 2025 as market turmoil set in.

What Buffett is saying today

Buffett also provided another investing lesson at the recent shareholder meeting. This one is aimed at investor emotion. The market may seem like it's been in turmoil recently, with a sharp decline of more than 20% followed by a quick recovery from that bear market level. Yet if you look at the bigger picture, you'll see that it didn't represent major market disruption.

Buffett stated, "What has happened in the last 30, 45 days...is really nothing," adding that Berkshire Hathaway's stock was cut in half three times during his 60 years running the company. He added that the recent bear market has not been "dramatic" at all.

Maybe one of his most important comments related to investor philosophy and approach was when he said, "People have emotions, but you got to check them at the door when you invest."

Buffett just announced that he'll be officially stepping down as CEO of Berkshire. The board of directors has named Greg Abel, currently vice chairman of Berkshire's non-insurance companies, as the new CEO beginning in 2026. Berkshire investors shouldn't be concerned about any change in philosophy, though.

Abel called Berkshire's current cash pile an enormous, strategic asset. Having investable cash on the sidelines can help allow all investors to weather difficult and stressful times.

Don't wait until there is fear and angst during down markets. Think of Berkshire's strategy and keep a balanced portfolio that includes investable cash, even in good times. No one knows whether the market is going to drop, soar, or just tread water, at least in the near term.

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Howard Smith has positions in Apple and Berkshire Hathaway. The Motley Fool has positions in and recommends Apple and Berkshire Hathaway. The Motley Fool has a disclosure policy.