How Is Warren Buffett Making Millions in a Market Crash?

Will the market crash in 2021? Maybe or maybe not. But it is good to be prepared. See how Warren Buffett prepares for a market crash.

| More on:
close-up photo of investor Warren Buffett

Image source: The Motley Fool

Ever wondered how the stock market works? The stock market pundits will give you all the financial analysis metrics. For many, it’s like they are speaking Chinese. But in layman’s terms, two emotions run the stock market: fear and greed. Even Warren Buffett said, “Be fearful when others are greedy and be greedy when others are fearful.” This advice is what helps Buffett make millions in a market crash.

The right way to invest in the stock market 

When you are looking at investing in a stock, look at it like deciding on a travel destination. You don’t close your eyes, point a place on the map, and, poof, you appear there. When you shortlist the destination, you read about the place, food, travel, stay, budget, and much more. Sometimes, all your planning will go stale for reasons beyond your control. For instance, people who planned to go to Britain for Christmas saw their flights getting canceled because of the mutated coronavirus.

Just like travel, your stock market investments might give you better-than-expected returns or negative returns. Remember, there will always be a risk of a market crash. But that should not stop you from investing. Instead, learn from the market movements and hedge your risks.

How Buffett makes money in a stock market crash

Warren Buffett uses two tricks that make him a winner in the stock market. The first is that buy when everyone sells and sell when everyone buys. Doing so will get you some lucrative deals. It’s the same as greed and fear. Now, don’t take this advice literally. It’s equally important to know what to buy and what to sell.

Buffett purchased Suncor Energy (TSX:SU)(NYSE:SU) in June when everyone was selling oil stocks. Suncor even cut its dividends by 55% to preserve cash. Now, Buffett looked at the stock as a long-term investment. The stock price has halved to $21-$22 as the pandemic disrupted travel and significantly reduced oil demand and oil price. The problem with commodities is they are cyclical and volatile. No single company can command the price.

But Suncor has the benefit of long-lived assets. Even if it stops oil production, its oil fields won’t dry up for 26 years. Moreover, renewable energy won’t significantly replace oil at least till 2040. At present, Suncor stock is down because the oil price is down. But the company will survive the crisis because of its large size and $13 billion in liquidity.

In the coming decade, people will travel more and oil prices will surge. Suncor’s management is reducing costs that will help it generate more profits when oil prices surge. More profits will give it room to increase dividends in the coming decade. The stock was hit by the financial crisis in 2009. But in 10 years, it doubled, plus it gave incremental dividends. Study the stock, look at its risks and rewards, and then make a call whether to buy or sell.

Buffett’s second lesson in a stock market crash

When investing in stock markets, Buffett says, “Spend only and exclusively what you can lose.” You create a portfolio of stocks where some are low risk, some are high risk, and some are dividend paying. One strong growth stock can recover your losses from other high-risk stocks.

For instance, Buffett invested billions of dollars in airlines in 2017 while being fearful. He was prepared to make a loss if his airlines bet backfired. Hence, he sold off $6 billion worth of airline stocks in April this year as his fears materialized. Now, his move contradicts his first advice of buy when others are fearful. But what if he was fearful? Many analysts questioned his decision when airline stocks surged temporarily in November.

Buffett was not greedy and didn’t wait for airline stocks to recover. Airlines are in a situation where no amount of planning will work unless the virus is controlled. It’s like that December trip to Britain that didn’t materialize.

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.

Fool contributor Puja Tayal has no position in any of the stocks mentioned.

More on Dividend Stocks

A stock price graph showing growth over time
Dividend Stocks

2 Safe TSX Stocks to Add to Your TFSA Amid Rising Volatility

Given their stable underlying businesses and healthy growth prospects, I'm bullish on these two low-volatility TSX stocks.

Read more »

A golden egg in a nest
Dividend Stocks

How to Turn $5 Into $50,000 for Retirement

Can you invest in your retirement goals even in this volatile market? The answer is yes, and an investment amount…

Read more »

Glass piggy bank
Dividend Stocks

Compound Interest: 3 Dividend Stocks That Can Make You Rich

If you're looking to maximize the incredible powers of compound interest while investing for the long haul, here are three…

Read more »

Dividend Stocks

TFSA Wealth: How Top Dividend Stocks Can Turn $10,000 Into $185,000

Here's how owning top TSX dividend stocks can help you build TFSA retirement wealth.

Read more »

Pixelated acronym REIT made from cubes, mosaic pattern
Dividend Stocks

Passive Income Seekers: Buy These 6%+ Dividend Stocks Before It’s Too Late!

These three dividend stocks all offer passive income above 6.5%! But don't plan on these valuable rates lasting long.

Read more »

money cash dividends
Stocks for Beginners

New Investors: The 2 Best Options to Earn Regular Passive Income

The stock market is heading into a new downturn, allowing investors to buy quality stocks for a bargain. Here are…

Read more »

A worker gives a business presentation.
Dividend Stocks

2 Top TSX Dividend Stocks to Buy in This Uncertain Market

Here's why Manulife (TSX:MFC)(NYSE:MFC) and SmartCentres REIT (TSX:SRU.UN) are two top TSX dividend stocks to consider right now.

Read more »

Businessperson's Hand Putting Coin In Piggybank
Dividend Stocks

RRSP Wealth: 2 Undervalued TSX Stocks to Buy Now and Own for 25 Years

RRSP investors can now buy top TSX stocks at discounted prices.

Read more »