Stock market crash: 4 warnings from billionaire Warren Buffett

After US stock prices tumbled in January, investors are more fearful of a stock market crash. Here’s what the world’s #1 investor thinks about meltdowns…

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

After three years of rising global stock prices, investors got a whiff of a stock market crash in January. The US S&P 500 index hit a record 4,818.62 points on 4 January, then plunged. At 2022’s low, it had lost nearly 600 points, hitting 4,222.62 on 24 January after diving 12.4%. But this correction didn’t last and the index closed at 4,515.55 on 31 January. Even so, the S&P 500 was down 5.3% last month, its worst January since the global financial crisis of 2007-09. But had it not bounced back since Wednesday, the S&P 500 would have suffered its worst start to a year in history.

Meanwhile, the tech-dominated Nasdaq Composite index peaked at 16,212.23 points on 19 November 2021. It ended 2021 at 15,644.97, before crashing to a low of 13,094.65 on 24 January. At this point, the Nasdaq had slumped by 16.3% in 2022. However, it also rebounded, ending the month at 14,239.88 to lose 9% in January. This was the index’s steepest monthly fall since November 2008. No wonder investors increasingly worry about the risks of a market meltdown. Here’s what mega-billionaire investment guru Warren Buffett has to say about stock market crashes.

Warren Buffett on stock market crashes

1. Warren on momentum trading

In an interview with CNBC on 10 January 2018, Buffett made this comment about momentum-driven market bubbles. “If you’re buying something because it went up yesterday or last week, that is not a good reason for buying anything. It will get you in trouble over time”. We know that momentum buying can drive up asset prices relentlessly for some time. While the music keeps playing, investors will keep on partying. But when the US Federal Reserve takes away the punchbowl, the party’s over. That’s why many investors worry that rising US interest rates could trigger a stock market crash.

2. Buffett on leverage

Leverage has been a factor in every major stock market crash since 1929. And since 2019, there has been a huge increase in US investors using leverage to enhance returns. Leverage involves borrowing money or using financial derivatives to magnify gains (and losses!) from trades. I view leverage as a double-edged sword, because it can harm as well as help. In 2010, Buffett said, “If you don’t have leverage, you don’t get in trouble. That’s the only way a smart person can go broke, basically. And I’ve always said, ‘If you’re smart, you don’t need it; and if you’re dumb, you shouldn’t be using it'”. 

3. Warren on bubbles and stock market crashes

Near the peak of the dotcom boom, Buffett gave this warning in his letter to Berkshire Hathaway investors in 2000. “A pin lies in wait for every bubble. And when the two eventually meet, a new wave of investors learns some very old lessons”. These lessons were that Wall Street “will sell investors anything they will buy. Second, speculation is most dangerous when it looks easiest”. For me, 2020-21 was the most speculative period I’ve seen since the dotcom bubble burst in 2000. That’s why I’ve been worrying about a stock market crash for several months.

4. Buffett on the next bubble

With 80 years of investing experience, Warren Buffett is a world-class expert on investing psychology and the human condition. In this inquiry interview on 28 March 2010, Buffett testified, “We will have other bubbles in the future. I mean, there’s no question about it”. For me, it’s not a question of if there will be another stock market crash, only when!

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Cliffdarcy has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares 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.

More on Investing Articles

Concept of two young professional men looking at a screen in a technological data centre
Investing Articles

After crashing 50%, is now the perfect time to buy this world-class FTSE 250 share?

The worst-performing share on the FTSE 250 over the last year is also the most exciting one of all. How…

Read more »

Illustration of flames over a black background
Investing Articles

Just released: July’s higher-risk, high-reward stock recommendation [PREMIUM PICKS]

Fire ideas will tend to be more adventurous and are designed for investors who can stomach a bit more volatility.

Read more »

Investing Articles

Is this one of the FTSE 100’s best-value growth shares?

Looking for great-value recovery shares to buy today? Based on City forecasts, this could be one of the best that…

Read more »

Investing Articles

Will the Tesco share price hit a 10-year high in 2024?

Up from 200p less than two years ago, the Tesco share price has enjoyed impressive growth lately. Now I'm considering…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

Nearing its 12-year low, this FTSE growth stock could be the bargain of the year!

Harvey Jones has happy memories of owning this FTSE 100 growth stock. Now he's wondering whether to take a trip…

Read more »

Investing Articles

BT share price: a bargain or one to avoid?

This Fool has been keeping tabs on the BT share price. Despite looking cheap, he's steering clear of the stock…

Read more »

Electric cars charging in station
Investing Articles

Where will Tesla stock be in 5 years? Here’s what the experts say

The analysts' outlook for Tesla stock in the next few years seems to be all over the place, as the…

Read more »

British flag, Big Ben, Houses of Parliament and British flag composition
Investing Articles

3 reasons why I predict UK shares will soar over the next 12 months!

Our writer believes there are plenty of reasons why UK shares will do well over the next year or so.…

Read more »