The idea of buying a stock before a stock market crash might seem like a terrible idea. On the face of it, if I’m anticipating a stock market crash, shouldn’t I wait until after to do my buying, when they’re at lower prices?
I don’t think that this is a great idea. The main reason I don’t aim to do that is I don’t know when a stock market crash might happen. And with the Bank of England warning of double-digit inflation, I’m not enamoured with the idea of keeping my money in cash as inflation pushes stock prices (as well as the price of everything else) higher. I think there’s a better strategy to prepare for a crash.
As is often the case when I think about investing strategies, I’m looking to Warren Buffett for ideas. Buffett says many things about investing. Some are funny. Some are informative. A few are neither. Many are both. One of my favourite Buffett quotes is the following:
It’s only when the tide goes out that you learn who has been swimming naked.
Buffett’s point here is that all kinds of bad investments can look good in favourable market conditions. Low interest rates and plentiful supplies of money can make all kinds of weak businesses look like great investments. But this is temporary. It always comes to an end eventually. And when it does, investors who commit money on pure speculation end up getting exposed.
Following Buffett’s advice, my plan to prepare for a stock market crash is to get my money into solid companies that won’t find themselves caught out when the tide of easy money and low interest rates turns. There’s an obvious one that I’ve been buying for my portfolio.
Unsurprisingly, the company is Berkshire Hathaway (NYSE:BRK-B). Let me be entirely clear here. I am not saying that Berkshire Hathaway’s share price won’t go down in a stock market crash. It almost certainly will. If the price of other shares fall, Berkshire will look less attractive compared to those stocks and the price of Berkshire Hathaway shares will fall too. But I think that the impact will be lessened by the company’s fortress-like balance sheet.
At the end of 2021, Berkshire had just under £147bn in cash. This means that it has more than enough capital on hand to meet its obligations as well as plenty available to seize opportunities, as they present themselves. Its AA credit rating means that it also has access to capital at reasonable rates should it need it. Whatever happens in a stock market crash, I think that Berkshire Hathaway will remain strong.
That’s one reason I’ve been buying Berkshire Hathaway shares. I happen to think that the company is one of the best investments on the stock market. But its vast cash reserves mean that I think it will fare relatively well in a stock market crash. A sudden downturn in share prices might present opportunities to sell Berkshire shares and pick up other companies at more attractive prices. But if it doesn’t, then I’d be happy owning Berkshire Hathaway shares forever. Either way, I’ll need to have an investment in Berkshire before the market crashes.
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Stephen Wright owns Berkshire Hathaway (B Shares). The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.