This degree of financial liquidity is one of the main reasons some shareholders are pushing for a dividend. But with fears of stagflation on the rise, is he actually planning ahead for a potential stock market crash?

Warren Buffett’s treasure hoard

At the end of 2021, Berkshire Hathaway held just over $146bn in cash & equivalent assets and short-term treasury bills. Following the start of the stock market correction in 2022, Buffett and his team spent over $51bn buying stocks.

The list of companies included Chevron, Occidental Petroleum, HP Inc, Apple, and Activision Blizzard. The decision to invest in Activision raised a few eyebrows since it appears to be an arbitrage investment, betting on Microsoft’s successful acquisition of the company. That’s quite an unusual move that has yet to pay off.

Overall, it was one of his most active buying quarters since the 2008 financial crisis. Skip ahead to the second quarter, and the spending pattern changes a bit. Berkshire remained a net buyer of stocks, spending a net $3.8bn on acquiring more shares in Apple, Chevron, Occidental Petroleum, and a handful of others. But that’s significantly less than a quarter ago.

Looking at the second quarter earnings, the impact of the 2022 stock market correction can be clearly felt, with the group posting a $53bn loss on its investments. It’s possible that as the economic situation worsened, Buffett and his team began tightening their belts. And then plan on buying more shares once the stock market tumbles further, or potentially even crashes.

It’s worth reiterating that even after all the investments made so far this year, the group still has around $105bn in cash at its disposal.

Planning for the next stock market crash

Looking at the latest activity from Berkshire Hathaway, it’s clear that Buffett continues to deploy his famous strategy of “be greedy when others are fearful, and fearful when others are greedy”.

The firm may be taking big hits to its equity portfolio today, but in the long-term, the group has a tendency to realise enormous gains from buying when prices are in free-fall.

Some investors like to buy shares in Berkshire, or copy its portfolio to tap into the proceeds of Buffett’s investing tactics. However, personally, I prefer to apply his principles to search for explosive long-term winners. Even here in the UK there are undoubtedly countless high-quality businesses with wide competitive moats currently trading at a discount.

Being able to identify these stocks is easier said than done. But by having some cash in reserve, as Buffett does, investors can capitalise on stock market downturns. And by buying top-tier businesses while they’re cheap, they can enjoy impressive returns once the stock market rally inevitably begins. At least, that’s what I think.

Higher prices make shares less attractive to investors like me. It means that I have to pay more for the same stocks that I was buying last week and last month.

That makes it harder to find attractive opportunities. But Activision Blizzard and Berkshire Hathaway are stocks that I’m happy buying for my portfolio today.

Berkshire Hathaway

Let’s start with Berkshire Hathaway. Share prices have been going up across the board and Berkshire’s shares are 11% higher than they were a month ago.

That means the stock is less attractive than it was a month ago – I’d rather buy shares at $276 than at $306. But Berkshire is still one of my best shares to buy right now.

The company is facing a number of headwinds at the moment, most notably inflation and the possibility of recession. But I think that Berkshire’s strength will see the business do well over time.

Unlike other insurance companies, Berkshire invests its float in common stocks, rather than bonds. This allows it to earn a greater return than its competitors, which allows it to buy even more stocks.

Why don’t other insurance companies do this? Investing in stocks rather than bonds requires substantial cash to cover the possibility of underwriting losses. Berkshire has this, but other insurers don’t.

In other words, Berkshire’s biggest advantage is its balance sheet. This allows it to be conservative in its insurance writing and to invest at higher rates of return than its competitors.

Activision Blizzard

Activision Blizzard is also one of my best shares to buy right now. In a turbulent market, I think that the stock offers a degree of predictability that is hard to find at the moment.

Since the company is the subject of a takeover bid, the investment thesis isn’t entirely about its earnings. Microsoft is attempting to buy Activision in its entirety at a price of $95 per share.

Today, the Activision share price is $80. This implies a gain of just over 18% if the deal goes through. 

There’s a risk that the deal might not complete, though. If it doesn’t, I think that the stock is likely to fall to around $67, meaning a probable downside of around 16%.

I think that the deal is likely to go through, though. That means that I think the stock is attractive on a risk vs. reward basis.

It’s not just me that thinks this. Yesterday’s 13F filings revealed that Warren Buffett has been buying shares as well.

Shares to buy now

The stock market looks uncertain to me at the moment. Rising share prices are making stocks riskier, so I’m looking for opportunities that are as straightforward as possible.

That makes Activision Blizzard and Berkshire Hathaway two of the best shares for me to buy today. Activision’s future is relatively clear one way or another, and Berkshire has enduring strengths.

As such, with £500 to invest today, I’d look to buy both stocks. 

Three of my investments, however, aren’t like that. There are three stocks in my portfolio that I don’t anticipate selling at any price.

This is because they are the highest-quality businesses I own. So if I sold the shares, I don’t think I’d be able to replace them with an upgrade.

Disney

The first stock I’d never sell is Walt Disney (NYSE:DIS). Both the stock and the business have had a turbulent time over the past few years, but I’ve never been tempted to sell my investment.

Like any investment, Disney stock carries some risk. In my view, the biggest risk comes from the cost of continuing to create new content, which could weigh on investment returns.

I think, however, that Disney’s content library gives it a huge advantage over its competitors that offsets this risk. Furthermore, the strength of the company’s back catalogue is basically impossible for rivals to replicate.

Disney is the only stock in this list that I’m actively buying at the moment. I think that the stock is currently undervalued and I’m looking at increasing my investment in the business.

Realty Income

I also have a substantial investment in Realty Income (NYSE:O) that I don’t ever intend to sell. Instead of selling, I plan to keep reinvesting dividends to increase my passive income.

Realty Income is a real estate investment trust (REIT) that makes money by leasing retail properties. Like other REITs, it distributes its rental income in the form of dividends.

The company is exposed to risk in the form of high property prices, which is making expansion difficult. But it has navigated these challenges well before and I think it will continue to do so.

Twenty-eight years of consecutive dividend increases make the stock a Dividend Aristocrat. It also reinforces my belief that the business can perform well in any economic environment.

Berkshire Hathaway

Lastly, I own shares in Berkshire Hathaway (NYSE:BRK.B). This is another stock that I never anticipate selling.

The risk with this stock is that the size of the underlying business limits growth opportunities. But I think that patience will be rewarded over time.

In my view, Berkshire has a unique advantage. It uses the money it receives from insurance premiums to make investments that power its earnings.

This is a good business model, but it takes a lot of capital to make it work. Underwriting its insurance obligations requires significant cash to cover potential losses.

Berkshire’s big advantage is that it has the cash to operate in this way. Other insurance operations don’t have the same protection.

This allows Berkshire to avoid unnecessary risk and be conservative in its insurance underwriting. I think this advantage is durable and so I’m never selling the stock.

Berkshire’s most recent 13F discloses 49 investments in US equities (investments outside the USA aren’t reported). I’ve been looking at that list to find stocks that I’d like to buy this month.

Apple

First on my list is Berkshire Hathaway’s largest holding. A 22% fall in the price of Apple (NASDAQ:AAPL) shares since the start of the year has caught my attention.

The main thing holding back the stock at the moment is its growth prospects. In the current economic climate, there’s a real concern that iPhone sales, for instance, might struggle.

But I think that a short-term headwind is a long-term opportunity. Since it accounts for only about 18% of the global smartphone market, Apple has room to expand over time. 

At the Berkshire Hathaway Annual Shareholder Meeting, Buffett said he intends to buy the stock below $150 a share in the future. As of today, the shares trade at $141. 

Citigroup

My second Buffett stock to buy in July is Citigroup (NYSE:C). He started buying this one for the Berkshire Hathaway portfolio at the start of the year.

I’ve been steadily accumulating Citigroup shares in my own portfolio too. With the stock falling by 24% since the beginning of January, I plan to buy more shares this month.

The company is in a restructuring process at the moment. The uncertainty around how the business will emerge from the process introduces an element of risk with an investment here.

But I think that the current share price more than justifies the risk. At its recent investor day, the company announced an ambition to achieve 11%-12% returns on tangible equity in the medium term.

The stock currently trades at a price-to-book (P/B) ratio of just over 0.5. If the company can reach its stated target from there, I think that the returns for me as an investor could be huge. 

Berkshire Hathaway

Last on my list of Warren Buffett stocks to buy in July is Berkshire Hathaway itself. In my view, owning the shares is the best way to invest like the Oracle of Omaha.

Since the start of 2022, they’re down 23%. More importantly than that, the share price has recently reached a level that I think is important.

At $268 a share, Berkshire Hathaway stock trades at a P/B ratio of below 1.2. Historically, Buffett has suggested that trading below this level is a sign that it’s materially undervalued.

Nowadays, Buffett thinks that Berkshire’s businesses are worth more than 120% of their collective book value. I therefore think that the current share price is cheap according to his standards.

Of course, he won’t be around forever and that’s a risk to the investment. But I think that the Berkshire Hathaway approach and culture should persist even when he isn’t running the business.

So as well as trying to follow Warren Buffett’s style, I’m also looking at the Berkshire Hathaway portfolio. From there, it comes down to valuation and I think Apple, Citigroup, and Berkshire itself are trading at attractive prices right now.

Quality is invaluable

It’s no secret that Warren Buffett only invests in quality stocks that provide good value. Over his decades of investing, he’s reiterated that a good investment has three main factors:

1. A good valuation with room for growth.
2. Strong pricing power and fundamentals.
3. An excellent moat with a margin of safety.

This is evident when analysing his company’s portfolio. The firm has positions in many of the world’s biggest companies. Many of these stocks have one thing in common. They’re market leaders that exhibit quality profit margins and healthy fundamentals.

A buffet of stocks

As the US S&P 500 flirts with bear market territory, the Oracle of Omaha has been going on a shopping spree. Warren Buffett has been buying shares in excellent companies for cheap valuations, having done the same during the 2008 financial crisis. He’s made mistakes in his investing career too, but he learns from them and moves on.

Be fearful when others are greedy, and greedy when others are fearful.

Warren Buffett

The current forward price-to-earnings (P/E) multiple for the S&P 500 stands at 16.6. This is below the five-year average of 18.6, and 10-year average of 16.9. As such, Warren Buffett has increased and even bought positions in several blue-chip stocks. These include PC giant HP, oil behemoths Chevron and Occidental Petroleum, and recently, entertainment conglomerate Paramount Global.

These purchases allow Warren Buffett to dollar cost average, as he continues to buy value stocks on the dip. Berkshire’s move to increase its stake in oil also allowed the firm to capitalise on sky-high oil prices. This has allowed the fund to hedge against the potential slowdown in earnings from its other positions. Consequently, Berkshire Hathaway has outperformed the S&P 500 by almost 20% this year.

Keeping it simple

Warren Buffett has always stressed on keeping investing simple. Buy shares in a great business for less than it’s worth, with managers of the highest integrity and ability. But what is a great business? As hinted at earlier, these are businesses with low debt, high levels of cash, healthy margins, strong growth, and an inelastic good/service. While this may seem simple, companies exhibiting all these traits are difficult to find.

So, despite already having an array of renowned names on his portfolio, the 91-year-old has expressed his regret in not purchasing shares of several top US companies. One is a personal favourite of mine, Alphabet. Although the tech giant came short of earnings expectations recently, he sees plenty of promise in the Google-owning firm. With a 20-1 stock split around the corner, I think Berkshire may add Alphabet to its portfolio. If so, I’d be even more confident in Warren Buffett’s ability to continue beating the stock market.

Circle of competence

The most important part of Buffett’s strategy involves sticking to what he knows. Alleghany’s insurance operations are closely connected to Berkshire’s existing operations (and Buffett claims to have been following the company for about 60 years) so the business is one that is within what the Oracle of Omaha calls his ‘circle of competence’.

For me too, investing like Warren Buffett means only buying shares in companies whose economics I can understand. For example, if I want to buy Rolls-Royce shares, I need to know that about 41%of its revenues come from civil aviation. I also need to understand what the costs of switching away from Rolls-Royce engines are for a manufacturer. And I need some idea of how the company’s exposure to titanium imported from Russia matters in the current political climate. That is staying within my circle of competence

Intrinsic value

Buying a company below what the Oracle of Omaha calls intrinsic business value is also important. The deal to buy Alleghany represents a price per share of $848. This is significantly higher than the company’s previous price of $677 a share. But Buffett takes the view that the price of the Alleghany deal represents a discount to the company’s intrinsic value. Importantly, the fact that the market was pricing Alleghany shares lower doesn’t influence his view of the company’s intrinsic value. Markets reflect what people are prepared to pay for a company, according to Buffet, not what the company is worth.

Figuring out the intrinsic value of a company is a matter of working out how much cash the company will produce over time. Exactly how to do this varies from business to business. But let’s take BP as an example. Establishing BP’s intrinsic value involves working out how much oil the company will produce, how much it will be able to sell that oil for, and what it will cost to extract it. Having figured this out, I can buy it when the company’s shares trade at a price below this valuation.

Patience

Lastly, Buffett’s Alleghany investment highlights the importance of being patient and waiting for opportunities. The last major Berkshire Hathaway acquisition was around six years ago. To the frustration of some, the company’s cash pile had grown to around $140bn before recent investments in Occidental Petroleum and Alleghany. But patience is an important part of Buffett’s approach to investing.

Being selective is an important part of echoing his approach. This means only taking the best opportunities that are available. If a suitably attractive opportunity isn’t available, then the Oracle of Omaha waits until it is. There will always be another opportunity, but it’s important to be prepared to take it when it comes around.

I don’t think that this is a great idea. The main reason I don’t aim to do that is I don’t know when a stock market crash might happen. And with the Bank of England warning of double-digit inflation, I’m not enamoured with the idea of keeping my money in cash as inflation pushes stock prices (as well as the price of everything else) higher. I think there’s a better strategy to prepare for a crash.

Warren Buffett

As is often the case when I think about investing strategies, I’m looking to Warren Buffett for ideas. Buffett says many things about investing. Some are funny. Some are informative. A few are neither. Many are both. One of my favourite Buffett quotes is the following:

It’s only when the tide goes out that you learn who has been swimming naked. 

Buffett’s point here is that all kinds of bad investments can look good in favourable market conditions. Low interest rates and plentiful supplies of money can make all kinds of weak businesses look like great investments. But this is temporary. It always comes to an end eventually. And when it does, investors who commit money on pure speculation end up getting exposed.

Following Buffett’s advice, my plan to prepare for a stock market crash is to get my money into solid companies that won’t find themselves caught out when the tide of easy money and low interest rates turns. There’s an obvious one that I’ve been buying for my portfolio. 

Berkshire Hathaway

Unsurprisingly, the company is Berkshire Hathaway (NYSE:BRK-B). Let me be entirely clear here. I am not saying that Berkshire Hathaway’s share price won’t go down in a stock market crash. It almost certainly will. If the price of other shares fall, Berkshire will look less attractive compared to those stocks and the price of Berkshire Hathaway shares will fall too. But I think that the impact will be lessened by the company’s fortress-like balance sheet.

At the end of 2021, Berkshire had just under £147bn in cash. This means that it has more than enough capital on hand to meet its obligations as well as plenty available to seize opportunities, as they present themselves. Its AA credit rating means that it also has access to capital at reasonable rates should it need it. Whatever happens in a stock market crash, I think that Berkshire Hathaway will remain strong.

That’s one reason I’ve been buying Berkshire Hathaway shares. I happen to think that the company is one of the best investments on the stock market. But its vast cash reserves mean that I think it will fare relatively well in a stock market crash. A sudden downturn in share prices might present opportunities to sell Berkshire shares and pick up other companies at more attractive prices. But if it doesn’t, then I’d be happy owning Berkshire Hathaway shares forever. Either way, I’ll need to have an investment in Berkshire before the market crashes.

Apple 

According to Berkshire Hathaway‘s (NYSE: BRK-A) SEC filing, Warren Buffett’s largest holding is Apple (NASDAQ: AAPL). Via Berkshire, Buffett owns 5.55% of the US tech giant’s total shares — a whopping 43% of his equity portfolio. Buffett began building a stake in Apple in 2016 and in his annual letter to Berkshire shareholders he praised CEO Tim Cook for Apple’s share repurchase strategy. 

One factor behind Buffett’s bullishness is the iPhone maker’s competitive advantage. Apple’s ecosystem is created by establishing market standards, encouraging developers to build apps tailored specifically to Apple smartphones. This produces a virtuous cycle, making Apple products indispensable. 

Nonetheless, Apple supplier Foxconn recently suspended its Shenzhen production due to a Covid-19 outbreak in the region. The Apple share price is still high for me, despite being down almost 14% on a three-month basis. Currently, I’m reluctant to deploy a significant amount of my cash reserves buying Apple in one go.

Indeed, Warren Buffett bought his position at an average cost of a quarter of today’s price. I will be buying steadily over the coming months to capitalise on any further dips in Apple’s share price. 

Bank of America 

At over 13% of Berkshire’s holdings, Bank of America (NYSE: BAC) is the second-largest constituent of Warren Buffett’s portfolio. The stock’s P/E ratio of 11.63 fits with Buffett’s value investing philosophy. Shareholders also benefit from a handy dividend yield of over 2%.

The Federal Reserve is tipped to hike interest rates in 2022. Bank of America should benefit from these macroeconomic conditions. Moreover, with a total net income of $32m for 2021, the bank is well placed to build on strong fundamentals this financial year. 

The stock currently sits almost 20% below its 52-week high in mid-February. Furthermore, the US economy is flashing recession warning signs. Bank of America shares could face further pain, given the bank services around 67 million consumer and small business clients stateside.

Despite these risks, I see Bank of America’s current share price as an attractive entry point to add this Warren Buffett stock to my portfolio. 

Another way to invest like Warren Buffett 

Perhaps the easiest way to mirror Warren Buffett’s investments is buying Berkshire Hathaway shares. The company’s compounded annual gain of 3,641,613% dwarfs the 30,209% gain for the S&P 500 from 1964 to 2021. For me, Berkshire stock carries some of the diversification benefits of an index fund while providing an opportunity to beat the market. 

Investors may worry about Buffett’s age at 91 while Vice-Chairman, Charlie Munger, is 97. Berkshire Hathaway’s share price performance without the duo at the helm is untested. This doesn’t dissuade me from owning the stock, however. I see the potential for future leadership to emulate Buffett’s investing approach beyond his lifetime. 

Berkshire currently has over $145bn in cash on its balance sheet and insurance is a large part of its business. A useful reminder for me that, with share valuations riding high, cash is king for scooping up bargains in the event of a stock market crash. 

However, although he has experienced multiple market sell-offs, Buffett has never changed his investment strategy. This is something I am trying to copy for my own portfolio. 

Rather than trying to time the market and predict the next stock market crash, which is all but impossible, I am focusing on finding the market’s best companies and sticking with these businesses for decades. 

With that in mind, here are three Buffett stocks I have been buying as a way to insulate my portfolio from a market decline. 

Stock market crash protection 

The first company is Buffett’s conglomerate, Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B). This corporation has several qualities that suggest it is the perfect vehicle to own to protect against uncertainty. 

Firstly, the firm has one of the most robust balance sheets of any Fortune 500 company. It has almost no debt and $140bn-plus of cash. As well as these resources, the corporation owns $300bn-plus of liquid securities, stocks and shares it can sell at any moment to realise cash. 

Not that the enterprise is likely to need cash anytime soon. Berkshire is built around a few core businesses, which are cash cows. From its railway unit to its utility division and insurance arm, the establishment owns some of corporate America’s largest and strongest companies. 

Warren Buffett’s reputation

The company’s size also gives it a solid competitive advantage over peers. Thanks to Buffett’s reputation, Berkshire has the pick of business deals. It can buy smaller firms and make deals with larger corporations that would be impossible with other partners.

For example, in the financial crisis, Buffett moved quickly to provide tens of billions of dollars in capital to struggling companies and demand a double-digit interest rate for the privilege. 

As such, not only is Berkshire strong enough to survive a stock market crash, but it also has the resources to take advantage of the situation. 

Unfortunately, the company’s association with Buffett is also a drawback. The billionaire is not getting any younger and, aged 91, he may not be at the helm for much longer. When he departs, the enterprise will lose its visionary CEO, and it could start to struggle for direction. 

Payment giant 

Considering the risk outlined above, I have been diversifying away from Berkshire, buying other stocks that I believe the ‘Oracle of Omaha’ would acquire for his portfolio or already owns. 

One of these companies is the payment processor Visa (NYSE: V). Buffett owns $2bn of this group in his Berkshire portfolio, and I also own the stock. 

Visa manages the global payment network for Visa cards. Every day it processes trillions of dollars transactions, and this number is only expanding. The company reported a spike in transactions throughout the pandemic as consumers moved away from cash.

Unfortunately, the corporation also suffered a decline in cross-border transactions, which are more lucrative. This decline hit its overall growth rate. 

Investors have also been expressing concern about the rise of other digital payments and cryptocurrencies. Some analysts believe that these payment methods could start to chip away at Visa’s position in the market. This is probably the most significant challenge the company faces right now. It is something I will be keeping an eye on as we advance. 

Still, I think this business has all the qualities I want to see in a company that can protect my portfolio from a stock market crash. If there is a crash, it seems unlikely there will be a significant decline in card transactions. Therefore, Visa should continue to generate cash. Management can then use this cash to acquire smaller peers to boost growth. The firm could also return some of its profits to investors with dividends and share repurchases. 

Former Warren Buffett stock 

The final stock I would buy for my portfolio is the retailer Tesco (LSE: TSCO). Buffett currently has no interest in this business, but he has owned the stock in the past. He sold the position after the company’s accounting scandal in 2014. 

Tesco is currently having to fight off a number of headwinds. These include rising wages and supply chain costs. The organisation is trying to reduce costs to maintain margins, but if the supply chain issues continue, I think these challenges could impact the company’s overall profitability. 

Nevertheless, as the largest food and drink retailer in the UK, the firm has a captive market. Consumers will always need to eat and drink, suggesting there will always be a market for its products. As such, it seems unlikely that its revenues will decline substantially in the event of a stock market crash.

Shares in the company might come under pressure but, fundamentally, the business should remain on track. This suggests that the stock should reflect the growth of the underlying business over the next few decades, and not short-term market fundamentals. 

In addition to these qualities, the stock also supports a healthy dividend yield of around 4%. Compared to Visa and Berkshire Hathaway, this level of income is incredibly attractive to me. That is why, although Buffett is no longer a fan of the company, I would acquire Tesco to provide me with some stock market crash protection. 

Berkshire Hathaway is a conglomerate that generates money from a variety of sources. Berkshire Hathaway Energy (BHE), the company’s electric utility arm, is one of them. At first glance, it’s easy to dismiss Berkshire Hathaway as a renewable energy investment option. BHE only accounts for around 9% of Berkshire Hathaway’s income, while renewable energy accounts for a little under half of the company’s overall energy output. However, I believe that BHE’s location inside Berkshire Hathaway provides it with a significant competitive edge over other electric utilities. I also believe it reduces some of the big risks that come with investing in the renewable energy transition

A significant advantage

Warren Buffett identified a fundamental advantage that BHE has over other power companies in his 2020 letter to shareholders. The majority of electric utility businesses pay out around 60% of their profits as dividends to income-seeking shareholders. This makes it much harder for them to invest in renewable energy infrastructure. Instead, they must finance their investments through debt or the issuance of stock, diluting the value of current owners’ shares.

BHE, on the other hand, does not pay a dividend. This may make it less appealing to those of us who appreciate passive income. But it means it may use the money it makes to invest in renewable energy projects without taking on debt or issuing stock to do so.

BHE has already been able to make significant renewable energy investments. It has spent more than $35bn on a variety of renewable energy initiatives while cutting back on fossil fuels. Coal-fired energy generation accounted for 74% of BHE’s total energy generation in 2006. By the end of 2020, the percentage had dropped to 33%. BHE was also able to spend $18bn on the transmission infrastructure needed for the renewable energy transition. All because of its access to capital.

Green energy investing risks

Over-optimism is the biggest danger I see with investing in green energy firms. While I believe that the transition to renewable energy is unavoidable, businesses must remain disciplined in their investments in this area. Making investments that don’t pay off can be costly, and it might even lead to bankruptcy. In 2016, SunEdison provided an excellent illustration of this.

However, I believe that BHE’s position inside Berkshire Hathaway mitigates this risk. This is due to two factors. The first is the capacity to invest in renewable energy with its funds rather than borrowing. The second is BHE’s position inside the larger conglomerate, which gives it access to $150bn in capital. Warren Buffett oversees the company’s investments as part of Berkshire Hathaway. When it comes to discovering good value assets, I can’t think of anybody better.

As a result, I believe that owning Berkshire Hathaway stock is a great way to participate in the renewable energy revolution.