Image source: Getty Images
Every so often, the stock market crashes. Trying to predict when this will happen is often futile and there is only so much one can do to prepare.
Investors like to repeat Warren Buffett’s admonition that “Be selfish when others are afraid” to them. But this is one of those guidelines that is good in theory, but the reality is often different.
Don’t sell?
If stock prices start to drop quickly, it may be tempting to try to limit the damage by selling before it drops. But this is a very dangerous strategy.
Just like no one knows when stocks will crash, no one knows when they will recover. And the beginning of a change is often when the share price rises very quickly.
No one buys stocks with the intention of selling them at a low price. But these events have a way of making people make decisions they may later regret.
Despite this, I don’t think selling is the worst thing an investor can do when the stock market crashes. It might be a bad idea, but there are worse things to come.
Don’t be afraid!
In my opinion, the worst thing one can do to risk the stock market is to panic. Avoiding this may be easier said than done, but I think it’s one thing that won’t help.
When stock prices fluctuate, it’s more important than ever to keep a clear head and make rational decisions. And panic can only get in the way of this.
Even selling can be a good idea – as Warren Buffett has invested in it American Airlines (NASDAQ:AAL) shows. After buying the stock for about $45 per share in 2017, Buffett last sold it in 2020 for $12 per share.
The stock doubled again in 2021, making Buffett’s decision to sell look like a bad one. But there’s a lot going on beneath the surface of this simple inspection.
Trading in market risk
Between 2019 and 2021, American Airlines has seen its long-term debt grow by nearly 66%. And in the end it needed help from the government to prevent the company from going bankrupt.
At the time, Buffett thought that if the airline had Berkshire Hathaway as an investor, the necessary capital may not be forthcoming. Their major shareholders with cash may have to step in.
It is worth noting that American Airlines has not fully recovered from the effects of this epidemic. Its long-term debt is still higher than in 2019 and the number of shares keeps growing.
The prospect of lower oil prices should help lower costs in 2025. But Buffett may have been wise to de-risk Berkshire Hathaway by selling when the stock is near its bottom.
Keep calm and keep investing
Buffett decided to sell shares in American Airlines and other major US carriers near their bottom. This may or may not turn out to be a good decision – and we may never know.
What I am sure of, however, is that Buffett made a completely calculated decision. And I think this is the key – in stock market risk, I think the worst thing an investor can do is panic.
Source link
