Stock market crash: I’d follow Warren Buffett’s advice to avoid these 3 costly errors

In a stock market crash like this one, following Warren Buffett’s proven advice can help you cut out errors and save yourself a fortune.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

You need to keep a cool head in a stock market crash. Otherwise you risk making serious errors that could cost you dearly in the longer run. Few investors have cooler heads the US billionaire Warren Buffett, and this has helped him negotiate crash after crash to build his fortune.

Warren Buffett has seen it all before, and knows how to respond in uncertain times like today. So what do his words of wisdom tells us right now?

1. Avoid panic when stock markets crash

It is easy to do things you regret in a stock market crash. Like selling at the bottom, just before it rebounds. Then buying back into the market at a much higher price.

You have to stay calm when shares are going crazy. As Warren Buffett put it: “Remember that the stock market is a manic depressive.”

It overreacts, both on the ups and the downs. Make sure you don’t. The best thing you can do is sit tight.

2. Choose your targets carefully

In a bull market, bad companies rise alongside the good. They often sink faster in a crash, though, because as Buffett famously said: “Only when the tide goes do you see who’s swimming naked.”

The tide is out today thanks to the pandemic, and it isn’t a pretty sight. It’s at moments like these that hidden deficiencies become exposed. Such as management that have lost control of the balance sheet, or been left behind by more nimble competitors.

So today you might want to avoid, say, companies whose net debt is suddenly several times bigger than their market cap, or have that been outpaced by whizzier online rivals.

By contrast, companies that have maintained dividends throughout the crisis may be doing something right. As are those that have shunned government furlough support, and are hiring rather than firing.

3. Look to the long term

A stock market crash can hurt. At the lowest point on 23 March, your portfolio could have fallen by up to a third. It hurts a lot less, if you think in terms of decades, rather than days or weeks. History shows us the stock market always recovers from a crash, provided you give it enough time.

You need to apply the same long-term attitude when buying stocks. As Warren Buffett said: “Time is the friend of the wonderful business, the enemy of the mediocre.” He also said that: “The stock market is designed to transfer money from the active to the patient.”

So look for wonderful businesses, and be patient with them. Prioritise FTSE 100 companies with a clear pitch to customers and a strong defensive ‘moat’ against competitors. Thanks to the stock market crash, many are trading at reduced prices.

Buy today with the aim of holding for them for years. Or follow Warren Buffett’s mantra. His favourite holding period is “forever”.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

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.

More on Investing Articles

Investing Articles

Prediction: these FTSE 100 stocks could be among 2025’s big winners

Picking the coming year's FTSE 100 winners isn't an easy task, but we're all thinking about it at this time…

Read more »

Investing Articles

This UK dividend share is currently yielding 8.1%!

Our writer’s been looking at a FTSE 250 dividend share that -- due to its impressive 8%+ yield -- is…

Read more »

Investing Articles

If an investor put £10,000 in Aviva shares, how much income would they get?

Aviva shares have had a solid run, and the FTSE 100 insurer has paid investors bags of dividends too. How…

Read more »

Investing Articles

Here’s why I’m still holding out for a Rolls-Royce share price dip

The Rolls-Royce share price shows no sign of falling yet, but I'm still hoping it's one I can buy on…

Read more »

Investing Articles

Greggs shares became 23% cheaper this week! Is it time for me to take advantage?

On the day the baker released its latest trading update, the price of Greggs shares tanked 15.8%. But could this…

Read more »

Investing Articles

Down 33% in 2024 — can the UK’s 2 worst blue-chips smash the stock market this year?

Harvey Jones takes a look at the two worst-performing shares on the FTSE 100 over the last 12 months. Could…

Read more »

Concept of two young professional men looking at a screen in a technological data centre
Investing Articles

Are National Grid shares all they’re cracked up to be?

Investors seem to love National Grid shares but Harvey Jones wonders if they’re making a clear-headed assessment of the risks…

Read more »

Investing For Beginners

Here’s what the crazy moves in the bond market could mean for UK shares

Jon Smith explains what rising UK Government bond yields signify for investors and talks about what could happen for UK…

Read more »