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Are we likely to face a stock market crash in the next 12 months? The FTSE100 has remained resilient so far and inflation in August has been below expectations. But if a crash occurs, what would billionaire investor Warren Buffett advise?
I mean, there are fears that inflation will jump above 10% in September, and that interest rates will rise again. This means that we have less purchasing power and borrowing costs increase.
So I definitely keep the possibility of another crash in the back of my mind. Or, at least, a low 12 months or more for equities.
Today, I’m looking at three tips from Warren Buffett that I think are especially relevant when we’re concerned about a stock market crash. The first is a frequently repeated quote, which is perhaps sometimes casually offered.
“Only buy something you would be perfectly happy to own if the market was closed for 10 years.”
I totally agree. And if the stock market was going to close tomorrow for 10 years, that would immediately crystallize the stocks I want to buy today.
But I find it quite difficult to pretend that the market is closed for a decade. Yes, I should just ignore short-term stock prices. But I can’t completely turn off the emotion when I see shares I own crumble.
Still, it’s a great approach, and the closer we can get to it, the easier I think we can weather market downturns.
It’s raining gold
I love this next one. Speaking of stock market crashes, in his 2016 letter to Berkshire Hathaway shareholders, Buffett said:
“Every decade or so, dark clouds will fill the economic skies and they will briefly rain down gold. When showers like this happen, it is imperative that we rush outside with basins and not teaspoons.“
He means that stock market slides are not to be feared, that they should be welcomed and approached with open arms – he also suggested being “fear when others are greedy” and “Greedy when others are fearful“.
A stock market crash is a period of cheap stocks. And we should take the opportunity to pick up as many as we can while they’re down.
The raging inflation
Here’s another, suggesting something similar:
“In the early 1980s, the time to buy stocks was when inflation was raging and the economy was in the tank… In short, bad news is an investor’s best friend..”
Galloping inflation, economy in the tank? Sound familiar? Buffett wrote it in a New York Times article from 2008.
Inflation in the UK reached 18% in 1980, at a time when energy prices were rising. It was perhaps the toughest recession since World War II. But by the end of 1989, Warren Buffett had had one of his best investing decades.
Here at the Motley Fool, we like Warren Buffett’s approach. That’s why I invest for the long term and use stock market crashes as opportunities to buy cheap stocks. And I try to control my short-term emotions.