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Warren Buffett: Bear Markets Can Appear in an Instant

A stock market crash does not come with prior warning

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Robert Stephens, CFA
Sep 14, 2021


  • Warren Buffett’s experience in capitalizing on bear markets could prove to be useful.
  • The end of a bull market can take place without warning over a very short time period.
  • Holding cash and avoiding debt could represent sound preparations for the next bear market.
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Warren Buffett (Trades, Portfolio) has experienced 10 bear markets since he purchased Berkshire Hathaway (BRK.A, Financial) (BRK.B, Financial) in 1965. As such, his views on how they could occur in future, and how investors can prepare for them, could be extremely valuable at the present time.

Of course, some investors may feel that the current bull market will continue for many months, or even years. They may believe that factors such as continued low interest rates, an improving economic outlook and fiscal and monetary policy support could push share prices to even higher levels following their 100% gain since the March 2020 crash.

While those investors could be correct, they may also prove to be wrong. Factors such as rich valuations across the stock market, the ongoing global pandemic and rising inflation that recently reached its highest level since 2008 could cause a deterioration in investor sentiment. Indeed, predicting the future prospects for the stock market remains an impossible task.

Moreover, as Buffett has previously highlighted, the stock market does not necessarily provide an obvious signal prior to its change from bull market to bear market, and vice versa. As he once said, “The light can at any time go from green to red without pausing at yellow.”

Perhaps the best example of this was the 2020 market crash when the S&P 500 declined by a third in under 11 weeks without any prior warning. In addition, there have been many similar examples in the stock market’s history that have caught out a wide range of unprepared investors.

Preparing for a changing stock market outlook

Due to the stock market’s lack of forewarning prior to a crash, it could be prudent to start preparing today for the end of the current bull market. History suggests that it will ultimately end, and a bear market will take over.

As such, following Buffett’s advice to maintain a sound financial position that avoids debt could prove to be prudent. As he once said, “When major declines occur, they offer extraordinary opportunities to those who are not handicapped by debt.” Indeed, avoiding the use of leverage when purchasing stocks and ensuring any other debts are affordable could be a sound first step to take.

In my view, it may also be prudent to gradually build a cash balance during a bull market. This may naturally occur, since investors could find that they sell overvalued stocks and struggle to unearth undervalued shares to purchase as the stock market’s price level rises.

A relatively large cash balance may act as a drag on a portfolio’s performance in the short run should the stock market continue to rise. However, it can provide the means to capitalize on the "extraordinary opportunities" described by Buffett. His career has largely been based on taking advantage of them. The next bear market could be an opportunity for all investors to do likewise.

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I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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