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Warren Buffett: Are We Approaching a Stock Market Cliff?

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Warren Buffett exited his position in all four airlines in April. This move triggered a loss of nearly US$50 billion. Even though most of it was effectively paper-loss, it’s still a pretty heavy blow. What this decision tells us is that Buffett doesn’t waste time in cutting his losses.

Buffett’s company, Berkshire Hathaway, could afford to hold on to these investments. Buffett could have waited for a better valuation to exit the position; he let go as soon as he made up his mind that airlines are not worth holding on to. But he also didn’t buy as aggressively after the market crash as he could have, despite an enormous cash pile at his disposal.

This made many people think that the market crash we saw wasn’t the only one, and Buffett might be waiting for another crash to initiate a buying frenzy. His other moves seem to augment this notion.

An unusual sale

Despite Buffett’s general aversion from tech, Apple is his largest holding. It makes up about 44% of his entire portfolio and is one of the primary contributors to its growth. Apple resonates with Buffett’s love of companies that have created a unique identity in the market and gathered a loyal consumer-base.

This is why it came as a shock to many when Buffett sold about $5 billion worth of Apple shares. Berkshire Hathaway’s September 30th SEC filing shows that the company has a $111.7 billion stake in Apple. If we consider its share price, the stock split in August, and the company’s June 30 holdings in Apple, it seems the company trimmed about $5 billion off its stake in Apple.

Buffett might be trying to lessen its portfolio’s dependence on one single stock so much or creating extra liquidity for another market crash. His unusual gold investment might also be an indication of further market volatility.

Market crash 2.0

If Buffett is indeed waiting for another crash, you may want to prepare as well. Even if you don’t want to do something as drastic as liquidating a significant portion of your portfolio, you can at least identify some good companies you may want to buy when they hit rock-bottom valuations. One of them can be Facedrive (TSXV:FD), an Ontario-based company with a market cap of about $1 billion right now.

The stock showed unusual growth after the market crash. In March, the share price dropped by about 58% of its pre-pandemic high. And when it grew, it left powerful recovery stocks like Lightspeed in the dust. Between mid-March and early July (when the stock reached its recent growth peak), the share price grew by over 1,100%.

So, if you had invested $5,000 in the company when it hit rock bottom when it was trading at $2 per share and sold it in July when the price peaked at $24.9 per share, you would have seen returns more than 10 times the capital (about $62,000).

Foolish takeaway

Investing is a long-term game, especially if you are a proponent of Buffett’s investment style. But every once in awhile, an opportunity like the one Facedrive offers comes along. If another market crash is on the horizon, more such opportunities might present themselves, and putting even a small amount on the right stock might result in enormous returns.

Speaking of Warren Buffett...

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Fool contributor Adam Othman has no position in any of the stocks mentioned. David Gardner owns shares of Apple. The Motley Fool owns shares of and recommends Apple and Berkshire Hathaway (B shares). The Motley Fool owns shares of Lightspeed POS 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 December 2020 $210 calls on Berkshire Hathaway (B shares).

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