In a recent article, I discussed the possibility of another stock market crash in 2020. Economic data looks absolutely dreadful at the moment (the UK economy shrank by a record 20.4% in April) and share prices simply don’t reflect this. Worryingly, a recent survey found that nearly 70% of professional money managers expect another stock market crash in the near future.
If there’s one investor who’s prepared for another stock market crash, it’s Warren Buffett. Recently, the greatest investor of all time has made a number of moves designed to minimise portfolio risk (and profit from lower share prices) in the event of a crash. Here’s a look at what Buffett has done to prepare for another crash.
Buffett has stockpiled cash
The first thing Buffett has done to prepare for another crash is stockpile cash. At the end of March, his investment company, Berkshire Hathaway, had a record $137bn in cash and liquid short-term investments, up from $128bn at the end of September. This cash pile will give Buffett plenty of options in the event of another stock market decline. “We really want to be prepared for anything,” he said. “The position isn’t that huge when I look at worst-case possibilities,” he added.
To be clear, Buffett doesn’t see cash as a good long-term investment. “Cash never makes us happy,” he’s said before. In 2011, Buffett noted that bank deposits were “among the most dangerous of assets,” due to inflation. However, he clearly sees appeal in holding cash in the current environment, in which uncertainty is elevated. If share prices do fall again, cash will give him the firepower to take advantage of opportunities that may arise.
Buffett sold these stocks
Another thing Buffett has done to prepare for another stock market crash is offload his airline stocks. Previously, he had large stakes in a number of major airlines, including American Airlines, United, and Delta. He sold these stocks because he believes the outlook for airlines has changed due to Covid-19 and that there’s risk to the downside now. “The world has changed for the airlines,” Buffett said. “The future is much less clear to me,” he noted about the airline business.
Another stock market crash: are you ready?
Ultimately, these two moves should protect Buffett from another crash, to a degree.
If share prices do fall, he’s ready to take advantage. While cash is a terrible investment over time, it’s a powerful asset in a stock market crash because it enables you to buy cheap stocks.
And by offloading his airline stocks, Buffett is less exposed to the uncertainty associated with Covid-19. These are the kinds of stocks that could be hit hard if we see a second wave of coronavirus.
The key takeaway for private investors from all this? It could be a good time to think about risk management.
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