Warren Buffett isn’t one to try to time the markets.

The legendary investor and CEO of Berkshire Hathaway prefers to play the long game.

“Our favourite holding period is forever,” he once quipped.

But that doesn’t mean the Oracle of Omaha is blind to the fact that stock market crashes happen.

In fact, the 92-year-old has lived through at least 12 stock market crashes. Yet he’s come out of it with a net worth north of US$115 billion.

Warren Buffett flags slowdown

Warren Buffett hosted Berkshire’s annual general meeting last week alongside his right-hand man Charlie Munger.

And he cautioned investors that the “incredible period” the United States economy has enjoyed over the previous year is winding down. Which in turn will impact Berkshire’s holdings.

“The majority of our businesses will report lower earnings this year than last year,” he said (quoted by Bloomberg).

But in a silver lining, fast-rising interest rates helped boost Berkshire’s investment earnings. Sitting on a mammoth cash pile, the company posted a quarterly profit of US$35.5 billion.

“Our investment income is going to be a lot larger this year than last year, and that’s built in,” Warren Buffett said.

Berkshire ended the quarter with some US$131 billion (AU$193 billion) in cash.

Speaking of cash…

That cash pile is an important aspect of how to tackle any upcoming stock market crash in line with Warren Buffett.

Even most top-name ASX stocks are likely to sell down if the wider market falls by 20% or more, which is the generally accepted definition of a crash. But quality stocks are also likely to enjoy the fastest recovery.

A lot of the selling during a stock market crash isn’t rational. Many companies will be sold down well below their intrinsic values.

And you don’t want to find yourself having to sell your ASX stock holdings when the market is at or near the lows.

“Hold cash for emergencies, then plan to spend the rest on smart investments,” Warren Buffett advises.

Indeed.

Make sure you’ve got enough cash set aside for any unexpected events, like medical emergencies or that major car repair.

Then look to invest some of the rest into top-run businesses selling at a fair price, like the Oracle of Omaha himself.

In line with his long-term investment horizon, he once wrote:

In business, I look for economic castles protected by unbreachable moats… We are trying to figure out what is keeping – why is that castle still standing? And what’s going to keep it standing or cause it not to be standing five, 10, 20 years from now.

Coca-Cola Co (NYSE: KO) is a classic example.

Warren Buffett is famous not only for guzzling five cans of coke a day, but Berkshire also owns 9% of the company’s stock.

Why?

According to Buffet, “If you gave me $100 billion and said take away the soft drink leadership of Coca-Cola in the world, I’d give it back to you and say it can’t be done.”

That’s one heck of a moat.

Investing on the ASX like Warren Buffett

Like Warren Buffett, I won’t speculate on when the next stock market crash will strike.

But with history as a guide, we do know another big market fall is coming. And we know that crashes are often preceded by periods of high inflation and fast-rising interest rates.

So, atop ensuring I have plenty of cash on hand to deal with emergencies and a bit extra to deploy when there look to be some top ASX bargains, I’ll prepare for that crash by investing in companies that are likely to be more resilient to the heavy selling. And likely to bounce back quickly on the recovery.

In a high-rate environment insurance companies can outperform.

Which is why Warren Buffett highlighted the improving fortunes of Berkshire’s auto insurance branch, Geico, noting that it’s also less correlated to business activity.

One option on the ASX is QBE Insurance Group Ltd (ASX: QBE). The QBE share price is up 22% over the past year.

Other defensive stocks that I think will weather a market crash better than most include Telstra Group Ltd (ASX: TLS) and Coles Group Ltd (ASX: COL).

At the end of the day, we all still need phones and the internet.

And we all still need to eat.

The post I’m following Warren Buffett and preparing for a stock market crash appeared first on The Motley Fool Australia.

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Motley Fool contributor Bernd Struben has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Berkshire Hathaway. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has recommended the following options: long January 2024 $47.50 calls on Coca-Cola. The Motley Fool Australia has positions in and has recommended Coles Group and Telstra Group. The Motley Fool Australia has recommended Berkshire Hathaway. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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