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The Market Crash Warren Buffett Warned You About Is Here!

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The last few trading sessions have seen markets lose significant value, confirming the inevitable. Since last Thursday, the S&P 500 Index has lost 7% and is bound to move lower in the upcoming days.

The sell-off was driven by tech stocks that were trading at sky-high multiples prior to the correction. Several investors and analysts were bracing for another market crash given that the stock markets are not in sync with the economy.

Unemployment rates continue to be at multi-year highs, and consumer spending remains subdued as people are largely staying at home. The COVID-19 pandemic has decimated several sectors, including retail, airline, energy, and hospitality, which means it might take global economies a couple of years to reach pre-pandemic level consumption.

According to the Warren Buffett Indicator, which calculates the market cap-to-GDP ratio, equities south of the border are trading at a premium of 74%. We can see why the Oracle of Omaha is a net seller of equities in 2020.

Warren Buffett did not go bottom fishing when the markets crashed in early 2020. Instead, he exited holdings in the airline sector, sold off positions in Goldman Sachs, and trimmed his position in Wells Fargo.

Warren Buffett-owned Berkshire Hathaway ended Q2 with $146 billion in cash, up from $128 billion at the end of 2019. This can be an ominous sign for investors, who should brace for another market crash in public equities.

How do you play the market crash?

If your risk appetite is low, you can consider buying defensive stocks such as Fortis, TransAlta Renewables, Emera, and Telus. These companies are considered recession-proof and have survived multiple economic downturns. Utility and telecom companies provide essential services and generate predictable cash flows, even during times of economic turmoil.

Alternatively, if you are eyeing growth stocks, you can consider Canadian companies such as Lightspeed POS (TSX:LSPD). Growth stocks such as LSPD have the potential to generate exponential wealth over the long term.

These companies have a high beta, which means they might underperform during a market sell-off. But growth companies generally crush market returns on a rebound. For example, the iShares S&P/TSX 60 Index Fund fell 36% between February and March 2020. Comparatively, LSPD stock was down 72% in this period. However, since then the index is up 43%, while LSPD has gained 305%.

LSPD stock might move significantly lower if the market sell-off is severe, and it has already declined 12% in the last week. But the long-term prospects of this billion-dollar tech stock remain intact.

Lightspeed aims to digitize the financial processes of small and medium businesses in the retail and restaurant sectors. It continues to focus on customer acquisition to grow its top line, and its cloud-based platform is easily scalable, which helps SMEs accept payments, manage operations, and engage with customers.

LSPD continues to expand its portfolio of solutions and increase customer spending. The Lightspeed Payments solution was introduced in 2019 and will help the company monetize a larger portion of the GTV (gross transaction value) processed on its platform.

The Foolish takeaway

A market crash tests investor patience and might be a scary prospect given the rapid decline in portfolio value. But if you have a diversified portfolio of quality stocks with a long-term outlook, the market weakness should be viewed as another buying opportunity.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares). The Motley Fool owns shares of Lightspeed POS Inc. The Motley Fool recommends FORTIS INC and recommends the following options: long January 2021 $200 calls on Berkshire Hathaway (B shares), short January 2021 $200 puts on Berkshire Hathaway (B shares), and short September 2020 $200 calls on Berkshire Hathaway (B shares). Fool contributor Aditya Raghunath has no position in any of the stocks mentioned.

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