Do not rely on the enemy not coming; rely on being ready to face him : To be fully prepared to deal with a stock market crash
"Do not rely on the enemy not coming; rely on being ready to face him."
(The Art of War : Variation in Tactics)
Do not hope that the enemy will not attack, but rather rely on being fully prepared to face the enemy's arrival. In stock investing, this principle translates to not relying on the assumption that a market crash will not occur, but instead, being fully prepared for when it inevitably does. A market crash can be triggered by unexpected events affecting a specific company, leading to a sharp decline in its stock price, or it can be a broader market collapse causing widespread declines. For investors who are prepared, a market crash can present valuable opportunities; for those who are unprepared, it can indeed be a catastrophic event.
Warren Buffett strongly advocates for always being prepared for the possibility of a market crash, rather than harboring the unrealistic expectation that stock prices will continue to rise smoothly after purchase, and that a crash will not happen. Buffett's strategy of avoiding the sharp and striking the weak emphasizes avoiding stock purchases when prices are high and conserving funds to enter the market during periods of price weakness. He frequently underscores the importance of waiting for the right investment opportunities, choosing not to rush into investments but to act decisively when the market severely undervalues quality stocks.
Case Study: The Financial Crisis of 2008
A prominent example of this strategy in action is Buffett's approach during the 2008 financial crisis. As global markets plummeted, causing panic among investors and leading to massive sell-offs, Buffett saw an opportunity. While many investors were selling in fear, Buffett, guided by his long-held belief in value investing, began buying up shares in solid companies that were trading at a fraction of their intrinsic value.
During the crisis, Buffett invested billions in companies like Goldman Sachs, General Electric, and Bank of America, securing favorable terms such as preferred shares with high dividend yields and warrants that allowed him to purchase additional shares at a discounted price in the future. His investment in Goldman Sachs, for example, not only provided the firm with much-needed capital during a time of financial turmoil but also yielded Berkshire Hathaway a significant profit over time as the markets recovered.
Buffett's actions during the financial crisis highlight the importance of maintaining capital reserves. His company, Berkshire Hathaway, had accumulated a substantial cash reserve prior to the crisis, which allowed him to act swiftly and take advantage of the rare opportunities presented by the market downturn. Buffett often likens this strategy to being a hunter who always keeps his gun ready: "If you want to shoot a rare and fast-moving elephant, you should always carry a gun."
In contrast, many ordinary investors found themselves in a difficult position during the 2008 crisis, with their portfolios heavily diminished and little capital left to take advantage of the low prices. Those who had not prepared for such an event missed out on the chance to buy quality stocks at significant discounts, resulting in a loss of potential long-term gains.
The key takeaway from Buffett’s approach is the emphasis on preparedness and patience in investing. By maintaining sufficient cash reserves and being vigilant for market opportunities, investors can position themselves to capitalize on downturns, turning potential disasters into profitable ventures. This strategy not only protects against the risks associated with market crashes but also enables investors to seize the opportunities that arise from them, ultimately leading to better long-term investment returns.
