In a bull market, "bad news" is easily digested; in a bear market, however, it becomes an unbearable burden. Sudden bad news forces already weak stock prices to retreat further. As long as an investor stays in the market long enough, they will inevitably encounter such situations. What should be done when bad news strikes?

In fact, "bad news" can be true or false, requiring careful discernment by investors. Leaving aside that some bad news is fabricated, even if genuine, it can transform into a positive opportunity for certain investors.

Historically, Warren Buffett has been adept at utilizing market "bad news" to generate excess returns. Almost all of Berkshire Hathaway’s major holdings were purchased at the bottom against a backdrop of significant crises faced by the listed companies—such as American Express, GEICO, The Washington Post Company, Coca-Cola, and Apple.

However, if the bad news signals that the company's fundamentals have been impaired, investors should cut their losses and admit their mistake in a timely manner, regardless of how low the stock price is. Ultimately, judging the impact of "bad news" stems from the investor's understanding of the company.

Just Treat It as a Lost "Dividend" Check

"Bad news" often brings good prices. If an excellent company encounters temporary difficulties, the capital market often overreacts with exaggeration, driving the stock price to the floor. This frequently forms a prime buying "window," as the company's fundamentals remain unchanged.

The mindset adopted by Buffett and Munger is worth emulating: if the "bad news" results in a one-time loss without damaging the fundamentals, the market's overreaction provides rational investors with a sufficient margin of safety. American Express belongs to this category.

In November 1963, American Express discovered it had suffered significant losses due to commercial fraud involving a warehouse. This warehouse belonged to an American Express subsidiary, with estimated total losses of $150 million. To make matters worse, shortly thereafter, President John F. Kennedy was assassinated in Dallas.

Almost everyone was in a state of panic; investors fled in fear, and American Express's stock price was slashed by more than half. American Express CEO Howard Clark intended to compensate the warehouse creditors with 60million.This60 million. This 60million.This60 million compensation pushed American Express to the brink of insolvency, and it was unclear whether the company would survive.

However, Buffett's investigation concluded that the usage of American Express traveler's checks and credit cards would not decline. Customers still trusted the company; the stain on Wall Street had not spread to Main Street.

Buffett said: "In my view, that $60 million is like a dividend that should have been distributed to shareholders but was accidentally lost in the mail. I mean, if the company announced it had lost $60 million in dividends, people wouldn't feel a disaster was imminent." Buffett bought as many American Express shares as possible at a sprinting pace without driving up the price. By April 1964, Buffett had invested $3 million in this stock, making it the largest investment of his partnership.

When "bad news" arrives, a plummeting stock price is likely to form a huge margin of safety for investors. Buying shares at a low price at this time is truly an excellent entry opportunity. This is especially true when a high-quality listed company experiences a stock price decline due to temporary difficulties. Although the price is falling, fundamentally, the company's long-term profitability has not been affected in the slightest. Once the market recognizes this, the stock price will rise significantly, allowing investors to make a substantial profit.

In Buffett's view, if a listed company's intrinsic value remains unchanged and it merely encounters temporary difficulties, abandoning it is sheer toddler logic.

The Cancer Surgery Method

If the unhealthy parts of an enterprise can be excised through "surgical" means without damaging the fundamentals, the stock price will eventually regress. Buffett's purchase of GEICO falls into this category.

In early 1976, GEICO announced a loss of $126 million for the previous year. In 1974, the company's stock had set a record of $42 per share, but now it had crashed miserably to $4.875 per share, deep in dire straits. This was the "Titanic event" of the insurance industry.

This significant loss occurred because GEICO erroneously relaxed its consistent practice of insuring only the lowest-risk drivers, while premiums remained as low as before. High-risk drivers caused frequent traffic accidents, causing the company's burden of medical and auto repair costs to skyrocket.

Like American Express in the 1960s, GEICO was "a great enterprise undergoing a baptism by storm." Yet, even amidst the dense gloom, Buffett could foresee the bright sunshine after the storm. Berkshire invested $25 million to purchase a 25% stake.

In analyzing the GEICO investment, Munger once said: "We have many friends who have spent their lives saving failing enterprises. They invariably use the following method—what I call the 'cancer surgery method.' GEICO's core business was excellent—though buried under other chaos, it was still functional. Having let success go to their heads, GEICO did some foolish things. They mistakenly thought that because they made a lot of money, they knew everything, and as a result, they suffered heavy losses."

In fact, after GEICO returned to its past low-cost operating methods, its advantages had not changed, and its profitability was revitalized.

"In the process of analyzing listed companies, some people fail to derive any insightful views even after weeks or months of analysis. But Benjamin Graham's analytical method always works—after experiencing a financial storm, the value of a listed company often increases and can be better understood by people," said Buffett.

Whenever the stock price of an excellent company plummets, it becomes easier for investors to discover past investment opportunities that they had missed, now presented before them once again. Excellent companies only appear at unbelievably low prices during such periods.

Buffett believes that the very fact these companies with long histories have survived to this day demonstrates they have withstood the test of history. Their business and performance are relatively stable; at most, they have encountered a severe crisis due to temporary difficulties. As long as they still occupy the minds of consumers, they will one day make a comeback, thereby bringing huge returns to investors.