The risk of a second stock market crash could create uncertainty among some investors about how to manage their portfolios. For example, you might find buying stocks a risky move. However, other assets such as cash and bonds offer disappointing returns in many cases.
Hence, it might make sense to follow Warren Buffett’s advice. His long track record of outperforming the stock market and his ability to turn short-term challenges to his advantage could be a useful guide in an uncertain time for the global economy.
Hold cash before a stock market crash
Predicting when the next stock market crash will occur is extremely difficult. As shown by this year’s decline in the market, a downturn can happen at any time without warning. However, the existence of risks like Brexit and the coronavirus pandemic mean that investor sentiment can be very changeable at this point. Therefore, the likelihood of a second downturn in global equity markets could increase in the months ahead.
So it might make sense to follow Warren Buffett’s lead and hold onto some cash. He always has a significant amount of cash available should the stock market drop to more attractive buying levels. This enables him to buy undervalued stocks when other investors sell them, improving his chances of generating impressive returns over the long term.
Of course, that doesn’t mean that investors should sell all stocks and only hold cash because of the risk of a stock market crash. However, given the difficult economic outlook, having some free liquidity at all times might be a wise move.
Identify high quality companies
Some high-quality stocks have rallied sharply after the 2020 stock market crash. As such, they may no longer offer a margin of safety. Identifying them and waiting for their prices to lower in a future market decline could be a profitable move. It can allow an investor to gain access to the best companies in a given sector if they offer significant capital growth potential.
Warren Buffett has always looked for the most attractive companies at the lowest prices. He has generally avoided just buying cheap stocks. Instead, he has focused on companies with large competitive advantages that can achieve relatively strong earnings growth over the long term.
By making a list of the most attractive companies ahead of a stock market crash, one can prepare for temporary misjudgments of the market. As this year’s market downturn has shown, the prices of stocks can sometimes only trade at low levels for a brief period of time. So researching now which stocks to buy if they lose value at a later date might be a logical strategy. This can allow an investor to follow Warren Buffett’s example and buy good quality companies when they are trading at low prices.
The post I would use Warren Buffett’s strategy to prepare for the next stock market crash appeared first on The Motley Fool Germany.
Is this the “next Netflix” (and a Corona winner)?
Due to Corona isolation, a trend is currently picking up speed twice, which could make early investors as happy as the first Netflix investors: gaming. Netflix has already prepared its shareholders for this development “We are competing with this disruptive trend … and we will probably lose it …!”. This company could dethrone Netflix as the king of next-gen entertainment. We’d like to give you all the details about this company.
This article was written in English by Peter Stephens and on 11/29/2020 at Fool.com.au released. It has been translated so that our German readers can take part in the discussion.
The Motley Fool Australia has no position in any of the stocks mentioned.
Motley Fool Deutschland 2020
Foto: The Motley Fool, Matt Koppenheffer
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