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Warren Buffett doesn’t fear stock market crashes. Here’s why!

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close-up photo of investor Warren Buffett
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By most measures, US stocks look overvalued today. That’s hardly surprising, given the S&P 500 index’s roaring rise since 2020’s lows. On ‘Meltdown Monday’ (23 March 2020), the S&P 500 crashed to just 2,191.86 points. On Friday, the index closed at 4,682.85, soaring by over 2,490 points in 20 months. That’s a staggering gain of 113.6%, meaning the index has more than doubled from its low. After such a stratospheric gain, surely a stock-market crash is inevitable, right? Maybe, but I don’t and won’t fear falling share prices. During these meltdowns, I seek advice from my favourite investment guru, Warren Buffett. Here’s why the mega-billionaire Oracle of Omaha doesn’t fear stock-market crashes.

1. Warren Buffett knows financial history

At the age of 91, Warren Buffett has been investing in stocks for 80 years (yes, from age 11). Hence, he is an expert on US stock-market history. On 16 October 2008, he wrote: “In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.” He wrote this during the depths of the 2007-09 global financial crisis, while urging investors to buy US stocks. On Friday, the Dow Jones Industrial Index closed above 36,100 points. Wow.

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2. Buy greedily when stocks are cheap

In the same New York Times article as the above quote, Warren Buffett also wrote: “Be fearful when others are greedy, and be greedy when others are fearful.” He then said that he planned to put 100% of his personal wealth into US equities. Like him, I’ve learnt that stock-market crashes usually offer incredible buying opportunities. Indeed, during 2020’s market lows, my wife and I invested 50% of our total wealth into cheap stocks. Today, this pot has roughly doubled. So why fear periodic market crashes?

3. Investors shouldn’t fear bad news

In the same article, Warren Buffett wrote: “Bad news is an investor’s best friend. It lets you buy a slice of America’s future at a marked-down price.” This echoes this sage advice Buffett gave in 1991: “Just buy something for less than it’s worth.” Having witnessed the market crashes of October 1987, 2000-03, 2007-09 and spring 2020, I know exactly what he means. When markets plunge, share prices of great businesses get hammered alongside those of weaker companies. It’s during these golden opportunities that I pile money into cheap UK stocks and US shares. Indeed, I’m rarely happier than when I’m buying stocks at substantial discounts to former heights.

4. Warren Buffett knows ice hockey

In the very same NYT article urging Americans to buy bombed-out stocks, Warren Buffett quoted a grandmaster from a very different field. Canadian ice-hockey star Wayne Gretsky was known as ‘the Great One’ for his mastery of the game. Gretsky once said: “I skate to where the puck is going to be, not to where it has been.” In other words, like Buffett, Gretsky looked to the future, not the past or present, to find sporting success. Buffett does the same with stocks by buying today, but with his eyes firmly fixed on future returns.

In summary, though I fear market crashes, I also welcome them. That’s when my cash goes to work best, buying cheap UK shares on lowly ratings and high dividends. These ‘crash buys’ have produced some outstanding returns!

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Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services, such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool, we believe that considering a diverse range of insights makes us better investors.

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