We have had one stock market crash this year, and may be due a second. Previous FTSE 100 bear markets have posted temporary recoveries, only for share prices to fall sharply again.
So although the index has climbed by around 1,000 points since the lows of March, there could be more trouble ahead.
By listening to the world’s most renowned investor, Warren Buffett, you can use the stock market crash to build your long-term wealth. This could even help you get rich and retire early.
Work this the stock market crash
As I write this, the FTSE 100 is slipping back towards 6,000. Investors have been shaken by repeated outbreaks of Covid-19, even in countries that thought they had it under control. Travel restrictions are back with a vengeance. Hundreds of thousands of jobs have gone, and things could get worse when the furlough scheme ends in October. There are good reasons to be scared of a second stock market crash.
Although Warren Buffett is famous for his success in investing shares, he also holds plenty of cash. His investment vehicle, Berkshire Hathaway, is sitting on a record £137bn. The pandemic has shown how everybody should hold at least six months worth of spending money on easy access, in case of redundancy or serious illness. Although maybe not as much as Buffett.
There is another reason to hold cash. That way you can take advantage of opportunities to buy stocks at bargain prices if we get a second market crash.
When assessing companies, the number one thing Warren Buffett looks for is a “sustainable competitive advantage.” This is particularly important when choosing UK stocks in the middle of a market crash. Plenty of mediocre companies can succeed when the economy is buoyant, you have to be on top of your game in a downturn.
So look for businesses that offer goods or services nobody else does, have a respected brand to underpin customer loyalty, and a strong defensive ‘moat’ to scare off competitors. Companies like these are well placed to weather the downturn, and benefit when the recovery finally kicks in.
Warren Buffett can make you rich
As Warren Buffett has famously said: “Price is what you pay, value is what you get.” This is particularly important to remember in the middle of a stock market crash. There are plenty of dirt cheap shares out there, but not all are bargains. I would avoid the airlines, for example. There is too much uncertainty in that industry.
Instead, I would scan the FTSE 100 and FTSE 250 for high-quality businesses that can survive today’s unprecedented times. History shows the stock market always recovers from a crash, if you give it long enough.
There is only one Warren Buffett. Following his tips will not turn you into a billionaire, but it can help you survive a second stock market crash, and continue building wealth for your retirement.
Harvey Jones has no position in any of the shares mentioned. 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.