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From time to time, the stock market crashes. Trying to predict when this will happen is often futile and there is much one can do to prepare.
Investors like to repeat Warren Buffett's instructions to “Be greedy when others are afraid” to themselves. But this is one of those instructions that is fine in theory, but the reality is often different.
Not sell?
When stock prices begin to decline rapidly, it can be tempting to try to limit the damage by selling before they go down. But this is a very risky strategy.
Just as no one knows when stocks will crash, no one knows when they will recover. And the beginning of the change is usually when the stock price rises the fastest.
No one buys stocks with the intention of selling them at a lower price. But these events have a way of making people make decisions they might later regret.
Despite this, I don't think selling is the worst thing an investor can do in a stock market crash. It may be a bad idea, but there is something much worse available.
Don't panic!
In my opinion, the worst thing anyone can do in a stock market crash is panic. Avoiding this may be easier said than done, but I think it's the only thing that can't be of any help.
When stock prices are volatile, it is more important than ever to keep a clear head and make reasoned decisions. And panic can only get in the way of this process.
Selling can even be a good idea, as demonstrated by Warren Buffett's investment in american airlines (NASDAQ:AAL) shows. After buying the shares at around $45 per share in 2017, Buffett sold the last ones in 2020 at $12 per share.
The stock has subsequently doubled in 2021, making Buffett's decision to sell look bad. But there is much more going on beneath the surface than this simplistic observation reveals.
Sell in a market downturn
Between 2019 and 2021, American Airlines saw its long-term debt increase by around 66%. And he ultimately needed government help to keep the company from going bankrupt.
At the time, Buffett reasoned that if the airline had Berkshire Hathaway As an investor, the necessary cash may not arrive. Instead, its cash-rich largest shareholder could be required to intervene.
It's worth noting that American Airlines has not yet fully recovered from the effects of the pandemic. Its long-term debt is still higher than in 2019 and the share count has continued to rise.
The prospect of falling oil prices should help reduce costs in 2025. But Buffett may well have done well 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 of American Airlines and other major US airlines near their lows. This may or may not have been a good decision, and we may never know.
However, what I am convinced of is that Buffett made an absolutely 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.
