There has been a lot of chatter recently about whether another stock market crash is coming. We’ve recently had the one-year anniversary of the crash of 2020, caused by the impact of the global pandemic. Even though the FTSE 100 index is nowhere near all-time highs, US stock markets are at record levels. So at a global level, there is some concern. On this basis, I’ve been looking through some comments from legendary investor Warren Buffett about what to do in this case.
When a stock market crash means it’s raining gold
The most relevant piece of advice I found from Warren Buffett with regards to a stock market crash was from a letter to his shareholders in 2016. He commented that “every decade or so, dark clouds will fill the economic skies, and they will briefly rain gold.”
Although a crash might not immediately feel like golden rain due to the economic uncertainty associated with it, it does present opportunities. This is what Buffett is getting at here. A crash offers potentially golden opportunities to buy stocks at discounted prices. This is because investors often panic-sell out of fear during a crash. In this way, the true value of the stock can be misaligned versus the share price during this period.
So when looking ahead, I’m keen to keep some funds in cash, in case we see a stock market crash. If we do, I’ll be able to buy fast!
One note of caution here is that Buffett remarks that these kind of events only happen “every decade or so”. Since we had a crash last year, there might not be another one for several years. So I’m not going to be putting everything on hold and waiting for a crash that might not come. Rather, I’m going to continue on my current regular investing strategy, but just ensure I leave myself some spare cash on the side.
Having the right mindset
Another piece of advice that I think is relevant for me is Warren Buffett’s comment that “the sillier the market’s behavior, the greater the opportunity for the businesslike investor.”
I’m not saying that a stock market crash is silly market behaviour. As with the crash last year, it was for a good reason. However, the silly behaviour can refer to other investors, and their influence on the market. For example, last year I could have panic-sold my stocks. If this was done by enough people, the price of the stock obviously would have fallen.
When the market rebounded strongly over subsequent months, I would have been kicking myself. So the message I get from this quote is that even if there is another market crash, being patient and businesslike is the best mindset to have. Part of this mindset is being long term in my thinking. Even if a crash happens, I should be able to ride it out over the years to come.
So overall, regardless of what gets thrown my way by the market this year, I feel prepared to deal with it!