In a recent article, I discussed the possibility of another stock market crash in 2020. Economic data looks absolutely terrible at the moment (the UK economy shrank by a record 20.4% in April) and stock prices simply don’t reflect that. What is worrying is that a recent survey found that almost 70% of professional wealth managers expect another stock market crash in the near future.
If there is one investor prepared for another stock market crash, it’s Warren Buffett. Lately, the biggest investor of all time has taken a number of measures to minimize portfolio risk (and to benefit from lower stock prices) in the event of a crash. Let’s take a closer look at what Buffett did to prepare for another crash.
Buffett hoarded money
The first thing Buffett did to prepare for another crash was to hoard cash. His company had at the end of March Berkshire Hathaway a record $ 137 billion in cash and cash equivalents, compared to $ 128 billion at the end of September. This money gives Buffett many options in the event of another market crash. “We really want to be prepared for everything,” he said. “The position is not that huge when I look at the worst case opportunities,” he added.
To put it bluntly, Buffett doesn’t see cash as a good long-term investment. “Cash never makes us happy,” he said earlier. In 2011, Buffett noted that bank deposits are “among the most dangerous of all assets” due to inflation. However, he clearly sees an attraction in holding cash in the current environment, where uncertainty is heightened. When stock prices fall again, the cash will give him the firepower to take advantage of the opportunities that arise.
Buffett sold these shares
Another thing Buffett has done to prepare for another stock market crash is the shedding of its airline shares. Previously, he had large stakes in a number of major airlines, including American Airlines, United and Delta. He sold these shares because he believes that the outlook for airlines has changed due to Covid-19 and that there is now a new risk. “The world has changed for airlines,” said Buffett. “The future is much less clear to me,” he said of the airline business.
Are you ready for another stock market crash?
Ultimately, these two steps should, to some extent, protect Buffett from another crash.
If the stock prices fall, he is ready to benefit from it. While cash is a terrible investment in the long run, it is an effective asset in a stock market crash because it allows you to buy cheap stocks.
And by selling his airlines’ stocks, Buffett is less exposed to the uncertainty associated with Covid-19. These are the types of stocks that could be hard hit when we see a second wave of the corona virus.
The key to success for investors in all of this? It could be a good time to think about risk management.
The post Warren Buffett is ready for another stock market crash appeared first on The Motley Fool Germany.
This article was written by Edward Sheldon in English and published on Fool.com on June 21, 2020. It has been translated so that our German readers can take part in the discussion.
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