There have been talks this year of a new stock market crash. Tumbling prices could see investors lose a significant portion of their net worth.
I’ve studied markets for years. I know there are ways to cope in a down market and survive crashes. The wisest investors I have studied usually profit from them!
And geniuses? They profit while the market is falling.
The greatest lessons here are from Warren Buffett, Michael Burry and Ray Dalio — three titans in the investment management world.
How to profit in a panic
The most important principle when investing is to know you are purchasing a stake in real, boots-on-the-ground companies.
One of Buffett’s famous statements is “Our favourite holding period is forever”.
There have been numerous stock market crashes since 1965 when Buffett began his association with Berkshire Hathaway. These include the 1987 Black Monday crash, the 2000 dot-com bubble burst, the 2008 global financial crisis and the 2020 Coronavirus crash.
Buffett has not only held shares through each of them, he’s also bought them when prices were low!
Famously, Buffett has owned Coca-Cola shares since 1988. He bought them a year after the Black Monday crash. Because of depressed prices, he bought Coca-Cola shares when they were significantly undervalued. That meant higher profits than usual were bound to come.
Calling all cash reserves for duty!
I always want to have some cash set aside. I’ll put it in short-term Treasury bills. That will give me some return and protect me in a minor way from inflation. I’ll then liquidate these and deploy that cash in companies at their new undervalued prices.
That’s how I like to profit in a panic. Warren Buffett style.
Will shorting the market leave me short?
Once upon a time, a little-known genius by the name of Michael Burry shorted the 2008 financial crisis. He stood to make $100m in personal income and $700m for his investors.
The truth is that shorting any market is a risky business. If prices keep going up, you are liable up to an infinite degree of what you owe.
It’s not like owning shares when you can only lose 100% of your investment if the price falls to zero.
Burry saw the intricate discrepancies in the subprime mortgage market and could bet against this with credit default swaps.
For the average mortal man, I do see investing like this as a significant risk.
Why I go long, slow and steady
Ray Dalio has some excellent wisdom on investing over the long term, and one of the strategies he employs is global diversification.
He has a portfolio called the All Weather portfolio. The 30% of the portfolio dedicated to shares exposes investors to global markets.
Global diversification means if a stock market crash is local, part of your portfolio in unaffected territories remains undamaged.
Dalio dedicates significant portions of his All Weather portfolio to bonds, commodities and gold as hedges against stock market crashes.
I like to own mainly equities. That gives me long, slow and steady profits for decades to come. That’s Buffett’s approach, too.
All I need is the wise judgement to choose the right companies, the cash reserves to buy at low value and the strong stomach to hold my winners even through the toughest times.
