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Warren Buffett is known for his approach to value stock investing. The billionaire investor’s long time horizons have allowed him to generate strong returns for decades.
This has even come during several recessions and market crashes. So here’s what I plan to do if the UK stock market crashes this year.
Proper use of money
In the year One of the most famous stories from the 2008 financial crash was Buffett’s $5 billion investment. Goldman Sachs, to help him have enough liquid to survive the crisis. One reason he was able to do this was because he had money on hand to deploy when the opportunity arose.
I need to manage my money wisely so that I can do the same if we see another downturn. Now if I’m fully invested and then a crash comes, I can’t make some bargains.
It’s obviously a balancing act. Now if I save a lot of money it is going to be severely eroded by double digit inflation. I have to use some, but I want to leave a part liquid.
Avoid shorting the market
Buffett is quoted as saying “He would never bet against America.”. The US stock market may crash in the short term. But the context of his quote is that it is always a loss not to think that the stock market will go up in the decades and centuries that America has lived.
I want to take this mindset with me and emulate it during future market downturns. I’d like to think Buffett would suggest never betting against the UK! Of course, in the short term there will be problems to solve problems like the current energy crisis. But if I look five or 10 years down the line, I can’t see this still being a problem.
Accordingly, I would avoid shorting the stock market, trying to try and survive the drop. I think it is an unwise move and it can lead to big losses.
Buying value stocks like Warren Buffett
The final point I would make is to focus on buying value stocks during the downturn. These types of firms are typically well-established, with stock prices below their perceived long-term fundamental value. In theory, if I buy when prices seem low, I should be able to profit when the storm blows over and the market corrects.
Buffett has been successfully buying value stocks for many years. It’s good for him, so I don’t understand why I don’t want to be like him. Also, in times of uncertainty, I’d rather own value stocks than some risky growth stocks. These usually work worse in times of stress.
Obviously, I don’t know if there is a crash nearby. But being prepared and having an idea of what I can do before and during that time will help.