Investing like Warren Buffett is difficult – it takes great skill, patience, and understanding. But there are aspects of the Oracle of Omaha’s approach investors like me can emulate.
One of the most important is Buffett’s strategy for dealing with stock market crashes. While the Berkshire Hathaway CEO doesn’t claim to know when the next downturn is coming, he’s always ready.
The Warren Buffett method
Warren Buffett is clearly someone who knows what he’s doing when it comes to investing. The Oracle of Omaha has a net worth over $115bn despite having lived through no fewer than 12 stock market crashes.
In a recent interview, Buffett explained the secret to his investing success. It comes down to making sure he – and Berkshire – are the last people left standing when everyone else is scrambling for cash.
At its core, this comes down to ensuring Berkshire always has plenty of cash around. Right now, the company has around $94bn available that can be used to seize opportunities, or to deal with emergencies.
Buffett acknowledged in the interview this approach has a downside. In bull markets, Berkshire doesn’t make as much money as it could have if it threw in all of its cash and took out loans to fund investments.
When things turn around, though, Berkshire is in a stronger position than its rivals. It is never forced to sell assets when prices are low and it can make investments at attractive prices when others can’t negotiate.
Being in a position of strength when things are tight has been key to Buffett’s success. And this is something even investors like me can do.
Investing like Buffett
They key to Buffett’s success is always having enough cash available to deal with whatever needs might show up. In the case of Berkshire, that’s primarily insurance claims in the event of unforeseen events.
Since I don’t write insurance claims, I don’t have those kind of potential costs to worry about. But things like a sudden increase in energy costs or being in a car accident could cause sudden expenses.
Taking this approach means making sure I have enough cash to deal with any of these kinds of possibilities. That way, I won’t find myself forced have to sell my stocks when I don’t want to.
Importantly, following this strategy doesn’t mean holding back from investment opportunities and waiting for a crash. Berkshire consistently makes investments at various times during the economic cycle.
Right now, for example, I think Forterra shares are trading at a good price. Following Buffett’s approach doesn’t mean keeping my money in cash and waiting for a crash to try and get a better price.
What it does mean, however, is making sure I only invest money I’m not going to need for other purposes. In Berkshire’s case, that’s potential insurance payouts, but for me it’s the expenses of everyday life.
Being ready for a market crash
I don’t know when a stock market crash is going to come. But by making sure I’m in a strong financial position, I intend to be ready for it when it does.
Having a high IQ isn’t required for this strategy. Even without Warren Buffett’s ability to identify investment opportunities, this is something I can do.
