The next stock market crash is coming at some point. A drop in the market is inevitable. Folks are going to hit the panic button after stocks drop 20% or more. This would be obvious for anyone who has invested as long as Warren Buffett has. The markets have crashed more than a dozen times as long as he’s been alive.
This is why investors should always be prepared for a stock market crash. It could happen due to an AI bubble, or it could not. It could happen tomorrow, or it could be decades from now. But prudent investors like the ‘Oracle of Omaha’ are always setting up their holdings to be ready for a crisis. Here are, in my view, the American billionaire’s top three tips to do so.
Tip 1
“Predicting rain doesn’t count, building the ark does.”
There’s some eternally true advice about crashes. The rain is inevitable, so there’s little point trying to guess when it arrives. The trick is to have a strong ark – or a portfolio in an investing sense – to withstand the tempest. That can mean diversifying across sectors or asset classes. It can also mean rebalancing once in a while to not be too exposed.
Buffett’s own firm is rebalancing on a grand scale recently. The Berkshire Hathaway (NYSE: BRKA) cash position is up to $380bn now. It was only $100bn in 2022. Many have speculated that he’s expecting a correction or some other opportunity to buy shares on the cheap. This kind of value investing has been a hallmark of his for decades. The signs are he’s already looking for value. Berkshire has opened five new positions already this year.
Tip 2
“It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”
The second nugget from Mr B recommends looking at a company first and share price second. Take a look at pretty much all of the best stocks from the last 50 years. Even buying at the very top before a crash usually leads to good returns over the long run. That’s because a great business will thrive even if you get in at a bad time.
The same could be said of Berkshire Hathaway too. The stock has not looked too cheap on some valuation metrics. But investors have collected nearly 20% yearly returns for decades on end.
Tip 3
“Be fearful when others are greedy, and greedy when others are fearful.”
This is arguably Buffett’s most famous quote, and with good reason. The fearfulness that comes with a stock market crash causes us to do crazy things. One of the worst is panic-selling good companies at a low point.
It’s not so simple to know when to be greedy or fearful in practice however. This is why many investors like to buy stocks like Berkshire Hathaway or investment funds where the decisions are made for them. Berkshire is a very US-centric company, which puts me off buying myself. But I’d say it’s one to consider for anyone concerned about a stock market crash.
