Every so often, the stock market crashes. Trying to predict when this will happen is usually futile and there’s only so much anyone can do to prepare.
Investors like to repeat Warren Buffett’s instruction to “be greedy when others are fearful” to themselves. But this is one of those instructions that’s fine in theory, but the reality is often different.
Don’t sell?
When share prices start going down quickly, it can be tempting to try and limit the damage by selling before they go lower. But this is a very risky strategy.
Just as nobody knows when stocks will crash, nobody knows when they will recover. And the start of the turnaround is usually when the share price climbs the fastest.
Nobody buys shares with the intention of selling them at a lower price. But these events have a way of getting people to make decisions they might later come to regret.
Despite this, I don’t think selling is the worst thing an investor can do in a stock market crash. It can be a bad idea, but there’s something much worse available.
Don’t panic!
In my view, the worst thing someone can do in a stock market crash is panic. Avoiding this might be easier said than done, but I think it’s the one thing that can’t possibly be of any help.
When share prices are volatile, it’s more important than ever to keep a clear head and make reasoned decisions. And panicking can only get in the way of this.
Even selling can be a good idea – as Warren Buffett’s investment in American Airlines (NASDAQ:AAL) shows. After buying the stock at around $45 per share in 2017, Buffett sold the last of it in 2020 at $12 per share.
The stock subsequently doubled in 2021, which makes Buffett’s decision to sell look like a bad one. But there’s a lot more going on beneath the surface than this simplistic observation reveals.
Selling in a market crash
Between 2019 and 2021, American Airlines saw its long-term debt increase by around 66%. And it ultmiately needed assistance from the government to prevent the firm from going bankrupt.
At the time, Buffett reasoned that if the airline had Berkshire Hathaway as an investor, the required cash might not be forthcoming. Their cash-rich major shareholder might be required to step in instead.
It’s worth noting that American Airlines still hasn’t fully recovered from the effects of the pandemic. Its long-term debt is still higher than it was in 2019 and the share count has kept increasing.
The prospect of falling oil prices should help bring down costs in 2025. But Buffett may well have been wise to get Berkshire Hathaway out of harm’s way by selling when the stock was near its lows.
Keep calm and keep investing
Buffett decided to sell shares in American Airlines and the other major US carriers near their lows. This may or may not turn out to have been a good decision – and maybe we’ll never know.
What I am convinced of, though, is that Buffett absolutely made a calculated decision. And I think this is the key – in a stock market crash, I think the worst thing an investor can do is panic.
The post Here’s the worst thing to do in a stock market crash (it isn’t selling) appeared first on The Motley Fool UK.
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Stephen Wright has positions in Berkshire Hathaway. 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.
