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this video is brought to you in partnership with stake if you're in Australia or New Zealand sign up using the code new money to get $10 free trading credit and a free US Stock when you fund your account stake rewards terms and conditions apply over the course of 2024 Warren Buffett the world's best investor has been building up a massive pile of cash the likes of which investors have never seen before $325 billion to be exact and what's even more concerning is his language around why he's doing it but I don't mind i when over the past year or so a massive discussion topic in the value investing Community has been the lack of opportunities in the market and the accumulation of cash in preparation for some sort of rough weather ahead so in this video I don't want to get Doom and Gloom on you but I do want to talk about the probability of a stock market correction and how you should best prepare yourself the Warren Buffett way no speculation just logical well-reasoned strategies also very quickly a reminder that all courses on new money education are currently 30% off if you've been interested in maybe picking up introduction to stock analysis for example which is our full 7-hour in-depth explainer on the Warren Buffett strategy you can now use the code B f24 at checkout to get a 30% discount this pricing won't last so make sure you're get in quick so what even is a stock market correction a market correction is a decline in the price of a stock or group of stocks typically defined as a drop of 10% or or more from a recent high it's worth noting that Corrections are a normal part of Market cycles and can occur in response to various factors including economic conditions such as interest rate movements external events such as the Corona virus or Wars they can even just occur from changes in investor sentiment so literally investors on mass start feeling more bearish about the future Corrections can happen to an individual stock say Tesla or Nvidia you can see each of those stocks suffering multiple Corrections across the past year you can also see a correction across a sector or industry for example in July and early August this year we saw a correction in the NASDAQ a list of predominantly Technology based businesses in the US and then of course finally you can see a correction in the overall Market itself as investor sentiment changes take the start of 2022 as an example that was when inflation crept up very high and the FED started signaling that they were going to raise interest rates now Beyond stock market Corrections you might have also heard people talking about bare markets and they're really just a sustained period of falling prices the internet will tell you that it's when you see a 20 plus% decline in prices but it's really just when there's a serious change in sentiment leading to a prolonged period of Market weakness for example while the market did correct at the start of 20122 based on the announcement that the Fed was going to flip monetary policy and raise rates that initial correction did eventually go on to form a part of a wider bare market across the whole of 2022 as investors had to deal with a flurry of interest rate rise es and vastly different economic conditions so for stock market Corrections you're looking at more days or weeks whereas for a bare Market you're looking at months or potentially years so they're the definitions and differences but now I wanted to talk about the probabilities of us actually seeing a stock market correction anytime soon as I mentioned at the top of the video a lot of very smart value investors are building up piles of cash to prepare for turbulent times ahead so where are we at the moment well it's no secret the US Stock Market is pretty darn overvalued at a shil of 37 and when you break it down further and look at all of the big companies in the S&P 500 it's true their valuations are seriously stretched and a lot of people will say that the stock market up at alltime highs means there's a correction on the horizon but actually that is not true at all occasionally very occasionally overvaluation can cause the prices of individual stocks to correct but it's typically not a deciding factor as to whether the stock Market more broadly dives into a correction there's a great quote from John Maynard kanes that says the stock market can stay rational longer than you can stay solvent and that is very true markets can stay overvalued for a very very long time so much so that it is a really bad strategy to bet on a market downfall based simply on irrationality happening in the market just trying to time the market doesn't work this is Warren Buffett explaining this point way back in 2001 things can go on on a long time that don't make sense but they do come to an end herbstein one time said anything that can't go on forever will end and usually it's some form of catalyst that ends things for an individual company this might be an earnings report or a market announcement for an industry it might be a new regulation or an external event think travel companies during covid times and for the broader market usually its external factors affecting the economy such as the outbreak of War a change in the macroeconomic envir M for example interest rate hikes or just a broad change in investor sentiment based on economic data like GDP growth productivity consumer spending could be earnings reports across the S&P 500 lots of different things but usually overvaluation alone doesn't make the market correct in most instances there is a catalyst for it so the next question is are there potential catalysts on the horizon today and the answer is well yes that doesn't mean they'll eventuate into any sort of Correction but there are very many potential Catalyst looming on the horizon as we speak one obvious one of recent times is the US election a change in power a change in policies a change in Direction can cause shakiness in the stock market you know beyond politics there's ongoing concern about persistent inflation and long-term inflationary forces if the Federal Reserve saw another inflation Spike and signaled the potential for further interest rate hikes that could very well be a Catalyst for Market weakness there's also a lot of discussion around China and Russia moving to diversify away from the US dollar and if trade tensions or tariffs escalate that could very well Shake investor confidence leading to a correction there are major Wars occurring in Ukraine and the Middle East that the United States is kind of indirectly involved in any escalations there could definitely Shake investor sentiment there's concern that the US economy might fall into a recession there's ongoing concerns around the debt ceiling and the growing deficit there's the ongoing slate of economic data releases for things like GDP growth employment consumer confidence Etc all of that stuff can weigh on investor sentiment there's a lot going on right now that could potentially have a negative impact on markets and going back to Warren Buffett's words around wanting to hold more cash quote with all that's going on in the world right now this isn't him predicting that a correction is on the horizon he's simply saying right now there are a lot of potential catalysts that could kick things off so he's making sure he's prepared for any outcome and that kind of perfectly leads us to the third part of the video which is how do we prepare for a stock market correction and also should we prepare for one as I was just saying it's a Fool's errand to try and time the market so is Warren Buffett going against his own best practices here well it kind of depends on how you think as an investor you know some investors are very comfortable admitting that they don't know how to pick the winners and they don't know when the winning times will be and if that's you it pays to be constantly invested and diversified across the broader Market sure the stock market might correct but you'll do far better just rioting the ups and downs over a long period of time so the first step in preparing for a stock market correction can just be diversification and a long-term mindset but then what if you are someone that builds their portfolio through individual stock selection someone that follows the Warren Buffett style approach well in that case building up cash reserves can be a very good idea to take advantage of those very infrequent moments where you do get sudden discounts in the market now there is Nuance to this because I will admit this does start to sound like you're timing the market which is a notoriously bad strategy but that's not exactly the case what you're actually doing is simply following a tried and true strategy we're looking to buy great businesses at fair prices and in times like this it's naturally very hard to find those opportunities so we're not trying to accumulate cash but just by following that approach that's exactly what ends up happening this is exactly what's happening to Warren Buffett right now and it can be extremely beneficial to have cash on the sidelines during stock market corrections as I said these are infrequent moments where you can buy low and Warren Buffett has even said in his 2016 shareholder letter that quote every decade or so dark clouds will fill the economic skies and they will briefly rain gold when down pause of that sort occur it's imperative that we rush Outdoors carrying wash tubs not teaspoons so we need to have at least some cash ready to take advantage of those infrequent opportunities that can really accelerate our annual returns and Warren Buffett's actually the perfect example keeping cash on the sidelines enabled him to act in a big way during the 2008 meltdown he invested $5 billion in Goldman Sachs at the height of the crisis and in return bsh received preferred shares with a 10% dividend plus warrants to buy additional Goldman shares at a set price so in the end this netted Buffet a $3.1 billion profit or 62% over 5 years he bought $3 billion worth of General Electric preferred shares which gave him a 10% annual dividend you know later in 2011 he invested $5 billion in Bank of America that made him an absolute Fortune having that cash on hand to invest in those sudden moments where the market or a stock very suddenly corrects can make a huge difference to your returns I mean I can talk about this from personal experience with my own stock portfolio back when the pandemic hit and the market dropped 30% in the space of 3 or 4 weeks I remember staying up one night talking to my friend heish the day before the FED came in and said they were going to rescue the economy I remember buying both Google and meta shares that night and if we zoom out today that turned out to be a very handy decision but what would the result have been if I hadn't had my cash ready to go that night if I had missed the sudden drop in both of those businesses my meta return would be 67% instead of 282 and my Google return would be 124% instead of 211% so these Corrections or crashes really do make a substantial difference for long-term minded value investors they really lift your returns in the long run investors behave in very human ways which is they get very excited during bull markets and when they look in the rearview mirror and they see a lot of money having been made in the last few years they plow in and they just push and push and push push on prices and when they look in the rview mirror and they see no money having been made they just say this is a lousy place to be so they don't care what's going on in the underlying business and it's it's astounding but that's that makes for a huge opportunity just huge opportunity having cash on hand is the first thing you need but another very important point in this conversation is also making sure you're ready to deploy that cash and this comes back to keeping on top of your research and I think this affects a lot of people when the markets are falling it's kind of interesting to do the research and stay up to date with your watch list but a lot of people myself included will find it a lot harder to stay motivator to do the work when everything is expensive and not even close to consideration for a potential investment I get it it's like banging your head into a brick wall but remember Charlie Munga saying 99% of great investing is in the waiting what we need to do is stay really up to date with our watch list during that 99% of the time so that when the 1% inevitably happens we're already ready to go things you won't believe in your lifetime and securities markets and the country will do very well over time but you will see these huge waves and then and uh if you can stay objective throughout that if you can detach yourself temperamentally from the crowd you get very rich so stay on top of the earnings reports stay on top of the conference calls stay on top of the valuations and then if you do have some cash set aside you can really benefit when those Corrections come along so in summary I think yes like what Warren says there are plenty of catalysts today that may trigger a correction in a very overvalued stock market but as Warren is doing instead of betting heavily on it happening we should instead look ahead as we always do with a small amount of cash on the sidelines to take advantage if something were to occur remember don't listen to the predictions and the commentary that you see on CNBC or from Talking Heads Like Me on YouTube I think we just need to stay focused on being in a position where we can capitalize if something were to go bang also again if you're interested in the full Warren Buffett stock selection strategy please make sure you check out our 7-hour course on new money education which goes through step by-step and teaches you everything you need to know as I said at the top of the video right now you can use the code bf2 24 and score 30% off I've already seen heaps of you guys getting on board which is absolutely awesome to see and hon honestly that really does help us out as a business course sales and YouTube AdSense revenue is basically what keeps the lights on for our business so I really appreciate you guys supporting my channel and also you know getting some Great Courses at the same time but apart from that guys please like this video And subscribe if you made it this far and with that said I'll see you all in the next one m
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