Buffett's Crash Prep: Focus on Quality Stocks
The stock market has been on an unstoppable run in recent years, but investors are increasingly concerned about a potential downturn. The Nasdaq (^IXIC) hit a new all-time high this week, and the S&P 500 (^GSPC) is less than 1% away from another record. However, nearly half of U.S. investors believe stock prices will fall in the next six months, according to the latest weekly survey from the American Association of Individual Investors.
Warren Buffett has some timeless advice for preparing for a stock market crash. He notes that investors need to choose their investments wisely, as market crashes can expose weak companies. During the Great Recession, Buffett wrote that 'just about all Americans came to believe that house prices would forever rise.' When the tide goes out, only strong stocks will stay afloat.
History has shown that some stocks are built on shaky foundations and may not survive a market crash. Between 1995 and 1999, the S&P 500 climbed by nearly 200%, fueled primarily by excitement around internet companies. However, many of those companies were unprofitable or poorly managed, leading to hundreds of tech stocks crashing and burning.
Despite this, some companies have thrived after a market crash. Microsoft, Apple, and Amazon all fell significantly during the dot-com bubble but are now industry-leading behemoths. Buffett's advice is to buy quality stocks with strong fundamentals and hold them for the long haul.