2 ways I’m imitating Warren Buffett when preparing for a stock market crash

Jon Smith considers some quotes from Warren Buffett when dealing with volatile markets and explains how he’s putting them into action.

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Buffett at the BRK AGM

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Warren Buffett has seen a lot happen in financial markets over his decades of investing. He’s survived many periods of market volatility, including Black Monday in 1987, the dotcom crash in 2000, and the 2008/09 financial crisis. With the escalations in tensions in the Middle East and political uncertainty in America, here are a couple of ways I’m copying previous actions from the great man.

Buying great stocks on the cheap

Buffett has been quoted as saying to “never bet against America. That is as true today as it was in 1789, during the Civil War, and in the depths of the Depression.”

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So even during volatile periods when the market may be falling, he’s still not looking to bet against America (or the broader stock market). This side of the pond, I can make the same case for never betting against the UK.

History shows me that during previous crashes, Buffett has used the opportunity to buy stocks at cheap levels with the assumption that the market will eventually recover. It always has.

Therefore, I’ve made a watchlist of stocks that I’d look to buy if we do get a market crash. For example, I like Trustpilot as a business. Yet the 160% share price rise over the past year and a rich price-to-earnings ratio of 185 means I think it’s overpriced. Yet if we saw the stock fall during a crash, this is a stock I’d buy.

Having a long-term view

Another quote from Buffett is that investors should “only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.”

If we did get a crash, it could be a while before the stock I buy recovers. Yet if I believe it to be a fundamentally sound company, this shouldn’t matter. For example, I like Bloomsbury Publishing (LSE:BMY).

Created with Highcharts 11.4.3Bloomsbury Publishing Plc PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.co.uk

The stock is up a whopping 80% over the past year. However, it’s also up 187% over a broader five-year period. This shows me that it isn’t just a flash in the pan. The business has performed well over a long period of time. This gives me confidence that even if the market does crash, it can recover.

The leading independent publisher is in a great position right now, as demand for traditional books alongside digital alternatives continues to be strong. The half-year results showed “a fifth consecutive double-digit growth in the first half with revenue growth of 32%”.

It’s working towards its vision for 2030, with clear steps to increase profitability along with the portfolio growth in general. As a risk, earlier this summer Sir Richard Lambert stepped down from being chairman after seven years in the position. Although his replacement is capable, he certainly has large boots to fill!

I’m thinking about buying the stock and imitating Buffett in my purchase while being happy to hold it over any potential market crash.

Like buying £1 for 31p

This seems ridiculous, but we almost never see shares looking this cheap. Yet this Share Advisor pick has a price/book ratio of 0.31. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 31p they invest!

Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.

What’s more, it currently boasts a stellar dividend yield of around 10%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?

See the full investment case

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.

Jon Smith has no position in any of the shares mentioned. The Motley Fool UK has recommended Bloomsbury Publishing Plc. 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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