If a Stock Market Crash Is Coming, Warren Buffett’s Playbook Says Do This 1 Thing Right Now
Fourteen recessions. Four major bear markets. A scary financial crisis. A global pandemic. Warren Buffett has survived and thrived through all of them.
Despite earning the nickname of “the Oracle of Omaha,” Buffett would be the first to tell you that he didn’t predict any of those challenging periods in advance. However, he probably knows better than nearly any investor on the planet the best way to navigate turbulent times.
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Today, stock valuations hover near record highs — a warning sign for investors in the past. Is a market meltdown around the corner? No one knows for sure, even Buffett. But if a stock market crash is coming, the legendary investor’s playbook says to do one thing right now.
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Buffett’s top way to be prepared for a stock market downturn
Has Buffett sold all of the stocks in Berkshire Hathaway‘s (NYSE:BRKA) (NYSE:BRKB) portfolio in the past to be prepared for a stock market downturn? Nope. He has always been adamant that he doesn’t know how the market will perform over the near term.
Buffett’s No. 1 step to be ready in the event of a stock market crash is a simple one: He builds a cash stockpile. When stocks decline enough, he has ample dry powder to put to work buying shares of great companies at a discount.
Note, though, that the term “cash stockpile” really refers to any readily available funds, even if they’re not in a cash account. For example, Berkshire Hathaway currently has a cash position of roughly $365.5 billion, but it includes cash, cash equivalents, and short-term investments in U.S. Treasury bonds.
Buffett doesn’t prefer to hoard a lot of cash. He even once stated, “Cash is always a bad investment.” His point was that inflation erodes the buying power of cash over time. However, he also compared cash to oxygen in a CNBC interview earlier this year. Buffett said, “You always need to have it [cash] available, because you do not know what will happen.”
No prediction skills required
How does Buffett know when to build cash and when to spend it? One of his most famous quotes is, “Be fearful when others are greedy and be greedy when others are fearful.” This principle has guided the investing icon’s moves through the years.
Buffett has used a key metric in the past to know when greed is rampant. It’s the ratio of total stock market capitalization to gross domestic product (GDP). This valuation metric is known as the Buffett indicator.
