With decades of investing experience under his belt, Buffett knows more than a thing or two about market crashes.
With a rough ride ahead of us, who better to take advice from than the Oracle of Omaha himself?
As the threat of COVID-19 threatens economic growth around the world, Buffett’s advice on surviving market crashes becomes increasingly relevant.
Don’t predict, prepare
“Predicting rain doesn’t count, building the ark does.”
While the forecast is gloomy, no one knows exactly how the stock market will react.
Tourism-related stocks have fallen hard due to visible impacts to their business, but there are other companies continuing to chug along.
Worrying over whether your stock will be impacted or not will not make things better. Instead, our time is better spent accessing the financial status of the company to see whether the company can survive a financial hit.
Smart investors can also prepare a shortlist of stocks to buy and be ready to pounce should the opportunity arise.
Losing your pants
“Only when the tide goes out do you discover who’s been swimming naked.”
Weak businesses and vulnerabilities are often exposed during times of financial stress.
For instance, the concentration of tourism assets at Straco Holdings (SGX: S68) was exposed when its aquariums were forced to shut down due to the COVID-19 virus.
However, it is not a time to be fearful of what may happen to your stocks. Instead, take the opportunity to find out and better understand the companies are able to hold up better than others.
With any luck, these resilience businesses could well be candidates for your investment watchlist.
Knowing what you don’t know
“What counts for most people in investing is not how much they know, but rather how realistically they define what they don’t know.”
Knowing what you don’t know can be more important than knowing what you know.
A market downturn could serve up cheap stocks but not every opportunity is worth investing. You should consider whether you truly understand the business and crucially whether what you buy will contribute to your financial goals.
There is no point buying a stock just because it has fallen.
Buy it because you want to own the business and not the other way around.
Get Smart: A marathon, not a sprint
The SARS episode heavily impacted the airline industry back in 2003.
Thankfully, the recovery from the downturn was swift, occurring faster than what the industry dared to hope. But there are no guarantees that the same V-shaped recovery will happen today.
But whether the recovery takes a quarter or more really shouldn’t matter too much if we are investors for the long haul.
If our time horizon stretches 10 years ahead, then our attention would be on what today’s businesses will look like a decade from now. By then, the COVID-19 virus should be a distant memory.
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Disclosure: Chin Hui Leong does not own any of the shares mentioned.
Photo source: Modified from Warren Buffett Caricature by DonkeyHotey under Creative Commons 2.0.
