Warren Buffett: How to Protect your Money in a Pullback

If there’s one person that knows how to weather a financial storm well, it’s the Oracle of Omaha, Warren Buffett.  So what’s his trick?

Trick No. 1 – Have Cash on Hand

Some people think it’s bad to have cash laying around, an “unproductive asset that acts as a drag on such markers as return on equity.”

But that’s not the case for Buffett.

“Cash, though, is to a business as oxygen is to an individual: never thought about when it is present, the only thing in mind when it is absent,” he says.

Trick No. 2 – Don’t Follow the Herd

In 2008, Buffett said “Beware the investment activity that produces applause; the great moves are usually greeted by yawns.”

Then in 2009, he said:

It’s been an ideal period for investors: A climate of fear is their best friend. Those who invest only when commentators are upbeat end up paying a heavy price for meaningless reassurance.

One of the key reasons that many investors underperform in the market is because they move in and out of assets at the wrong time. When an investor sees everyone else making money from rising markets, that’s when they tend to throw every spare dollar into their investments. Unfortunately, when that same investor sees a group of other investors selling, the investor sells, too.

In short, they get caught up in herd mentality.

Remember, “Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one,” noted Charles Mackay in Extraordinary Popular Delusions and the Madness of Crowds.

Granted, that was written in 1841.  But what he had to say about the mass mania and the behavior of the crowd remains relative to this day.

Trick No. 3 – Be in a Strong Position to Capitalize

With cash on hand, Buffett has the financial flexibility to jump on opportunities that popped up.  As the billionaire often points out, keeping some cash on hand allows you to take advantage of corrections without having to sell other investments.

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