Warren Buffett: Should You Wait for a Market Crash Before Buying Stocks?

It seems like nearly every video on YouTube is warning investors that stock prices are too high and that they should be worrying about an upcoming stock market crash. With the stock market hitting all-time highs, I need to better understand how I should be navigating investing in a stock market where some of my favorite stocks are trading at record prices. To learn more about this, I turned to my favorite investor to study: Warren Buffett. I found this great clip of Warren discussing whether you should buy stocks in great companies or wait for a crash to buy them at an even cheaper price. Make sure to stick around and we'll discuss how you can apply these lessons from Buffett to your own portfolio. Enjoy.

Zone five. Well, you did what you wanted. I mean, you followed my advice. [Laughter] I'm batting a thousand. We'll see what you're betting next lifetime year.

Uh, I have— one thing that struck me in the way that I followed your investment is that you wait until businesses, great businesses, get pounded down and then you bet big on them like American Express and Disney at one time. My question is, I have capital to invest but I haven't yet invested it. I have three great companies which I've identified: Coca-Cola, Gillette, and McDonald's. My question is if I have a lifetime ahead of me which I want to keep an investment in more...

Yeah, well, I won't comment on the three companies that you've named, but in general terms, unless you find the prices of a great company really offensive, if you feel you've identified it, by definition, a great company is one that's going to remain great for 30 years. If it's going to be a great company for three years, you know it ain't a great company. I mean it. So you really want to go along with the idea of something that if you were going to take a trip for 20 years, you wouldn't feel bad leaving the money in with no orders, with your broker, and no power of attorney or anything, and you just go on the trip and you know you come back and it's going to be a terribly strong company.

[Music] I think it's better just to own them. I mean, you know, we could attempt to buy and sell some of the things that we own that we think are fine businesses, but they're too hard to find. I mean, we found Sea's Candy in 1907. Where we find here and there we get the opportunity to do something, but they're too hard to find. So to sit there and hope that you buy them in the throes of some panic, you know, that you'd sort of take the attitude of a mortician, you know, waiting for a flu epidemic or something. I mean it... I'm not sure that that will be a great technique. I mean, it may be great if you inherit—you know, Paul Getty inherited the money at the bottom in '32. I mean he didn't inherit exactly; he talked his mother out of it. But it's true, actually—close enough. Yeah, close it up, right? But he benefited enormously by having access to a lot of cash in the early '30s that he didn't have access to in the late '20s.

And so you get some accidents like that, but that's a lot to count on. You know, if you start with the Dow at X and you think it's too high, you know, when it goes to 90 percent of X, you buy. Well, if it does, and it goes to 50 percent of X, you know, you never get the benefit of those extremes anyway unless you just come into some accidental sum of money at some time. So I think the main thing to do is find wonderful businesses.

That is Phil Correa here! We've got the world—yeah, there’s the hero of investing. Phil, would you stand up? Phil is 99; he wrote a book on investing in 1924. [Applause] Phil has done awfully well by finding businesses he likes and sticking with them and not worrying too much about what they do day-to-day. There's going to be an article in The Wall Street Journal about Phil on May 28th, and I advise you all to read it. You'll probably learn a lot more with him by coming to this meeting. But it's that approach of buying businesses.

I mean, let's just say there was no stock market, and the owner of the best business in whatever your hometown is came to you and said, "Look, my brother just died, and he owned 20 percent of the business, and I want somebody to go in with me to buy that 20." The price looks a little high maybe, but what I think I can get for you... you know, do you want to buy in? You know, I think if you like the business and you like the person who's coming to you, and the price sounds reasonable, and you really know the business, I think probably the thing to do is to take it and don't worry about how it's quoted and won't be quoted tomorrow or next week or next month. I think people's investment would be more intelligent if stocks were quoted about once a year, but it isn't going to happen that way. So, and if you happen to come into some added money when at some time when something dramatic has happened—I mean, we did well back in 1964 because American Express ran into a crook, you know. We did well in 1976 because Geico’s managers and auditors didn't know what the loss reserve should have been the previous couple of years. So we've had our share of flu epidemics, but you don't want to spend your life waiting around for...

Zone six. One of my biggest lessons from studying Warren Buffett is the realization that nobody can consistently and accurately predict market crashes. Something I've realized is that if the greatest investor of all time, Warren Buffett, admits he can't predict stock market crashes, who am I to believe that I can predict them? One of my favorite investing quotes is by another legendary investor, Peter Lynch. He says that far more money has been lost by investors preparing for corrections or trying to anticipate corrections than has been lost in corrections themselves.

With that being said, there are two important questions I want to answer. One: why are market crashes so difficult to predict? And two: knowing that fact, what can you do about it to invest successfully?

So on the first point, stock market crashes are difficult to predict for a variety of reasons, but here are two main reasons I want to highlight. The first reason is that future economic conditions, which drive the stock market, are notoriously difficult to forecast. Things that cause slowdowns in the economy are almost always unexpected. Just take the economic situation early 2020 that caused the steepest ever fall in the stock market. Just a couple of months earlier, who could have recently predicted that could have happened?

The second reason is that stock prices and valuations may be high relative to historical trends, but that doesn't mean a crash is imminent. It may very well mean that they just stay at these elevated levels for a long time, and that future returns on the stock market are low as a result.

So while predicting a stock market crash may make for good news and a lot of views, it is very likely that the stock market may just stay around the same level for an extended period of time.

So now that we understand that stock market crashes are nearly impossible to predict, what can an investor do about it? According to Warren Buffett, the answer to that question is to buy great companies with durable competitive advantages and hold those stocks for the long term. This means buying stocks for which you truly understand the business and that will continue to generate high returns on invested capital for decades. Coca-Cola, American Express, and the railroad BNSF have all been examples of those types of companies in Buffett's portfolio.

Buffett makes it really clear that it is worth paying up for a quality business. While you may have to pay 20 or 30 percent more than you would have liked for the stock of a great company, over a long enough holding period, the cash that quality business will generate can validate the high price you have to pay for it.

So, there we have it! Make sure to like this video and subscribe to the channel because it is my goal to make you a better investor by studying the world's greatest investors. See you next video!