The Motley Fool

3 insights from Warren Buffett about handling a stock market crash

Warren Buffett at a Berkshire Hathaway AGM
Image source: The Motley Fool

With the recent alarm about the discovery of the new Covid-19 variant, some are thinking that this could lead to another stock market crash. To this end, the FTSE 100 fell 3.6% on Friday, to close at 7,044 points. Although it’s very early to make a definite call on the future, I can look to the past and glean insights from legendary investor Warren Buffett. Having invested through multiple market cycles, Buffett has offered plenty of tips on dealing with things when it gets rough.

Knowing what’s going on

A great point straight off the bat from Warren Buffett is that “risk comes from not knowing what you’re doing”. That is true at all stages of a stock market cycle, but even more so during a market crash. This is because the volatility is usually elevated during periods of uncertainty.

5 Stocks For Trying To Build Wealth After 50

Markets around the world are reeling from the coronavirus pandemic… and with so many great companies trading at what look to be ‘discount-bin’ prices, now could be the time for savvy investors to snap up some potential bargains.

But whether you’re a newbie investor or a seasoned pro, deciding which stocks to add to your shopping list can be a daunting prospect during such unprecedented times.

Fortunately, The Motley Fool UK analyst team have short-listed five companies that they believe STILL boast significant long-term growth prospects despite the global upheaval…

We’re sharing the names in a special FREE investing report that you can download today. And if you’re 50 or over, we believe these stocks could be a great fit for any well-diversified portfolio.

Click here to claim your free copy now!

This volatility can present opportunities, but also risk. So I need to be aware of what the potential downside is of any stocks I buy. For example, how far away is the current price from the lows of the past year? In a market crash, it could reach these levels again, so I need to be comfortable with whatever that unrealised loss might be.

I could also add unnecessary risk by not being diversified. For example, airline and travel stocks were hit the hardest on Friday. If I just bought stocks from this sector, I’d be adding a lot of risk. Rather, I’d be better off buying a mix of stocks from different areas of the economy, which should help to reduce my overall exposure to one particular area.

Planning ahead

When considering what might happen in coming weeks, another quote from Warren Buffett comes to mind. He once said that “predicting rain doesn’t count. Building arks does”.

At the moment, we’re all unsure about how much of a negative impact the latest virus news could have on the market in general. But to some extent, trying to predict it isn’t the key thing right now. It’s preparation that’s important.

Preparing myself means a few different things. For example, it involves looking at my entire portfolio and seeing what’s most at risk. Could I hedge this risk through buying some defensive stocks? Or would it make sense to buy some other assets such as gold? Thinking and acting on these points now will put me in a better position if the rain starts to pour.

Making my own decisions

As a final point, I always try to remember that my choices regarding what I buy and sell are up to me. Warren Buffett mentioned that “you never know who’s swimming naked until the tide goes out”. 

The decisions of friends and other investors are completely up to them. But I shouldn’t just copy whatever they say and do. After all, a stock market crash really does show who’s swimming naked with regards to bad investment decisions!

Rather, I should be happy with the calls I’ve made, as the last thing I want to happen is for me to be sat on losses from risky stocks that I only bought to avoid the fear of missing out.

5 Stocks For Trying To Build Wealth After 50

Markets around the world are reeling from the coronavirus pandemic…

And with so many great companies still trading at what look to be ‘discount-bin’ prices, now could be the time for savvy investors to snap up some potential bargains.

But whether you’re a newbie investor or a seasoned pro, deciding which stocks to add to your shopping list can be a daunting prospect during such unprecedented times.

Fortunately, The Motley Fool is here to help: our UK Chief Investment Officer and his analyst team have short-listed five companies that they believe STILL boast significant long-term growth prospects despite the global lock-down…

You see, here at The Motley Fool we don’t believe “over-trading” is the right path to financial freedom in retirement; instead, we advocate buying and holding (for AT LEAST three to five years) 15 or more quality companies, with shareholder-focused management teams at the helm.

That’s why we’re sharing the names of all five of these companies in a special investing report that you can download today for FREE. If you’re 50 or over, we believe these stocks could be a great fit for any well-diversified portfolio, and that you can consider building a position in all five right away.

Click here to claim your free copy of this special investing report now!

Jon Smith and The Motley Fool UK have no position in any share mentioned. 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.

Our 6 'Best Buys Now' Shares

Renowned stock-picker Mark Rogers and his analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply click below to discover how you can take advantage of this.