I can’t time the market, but regardless of what happens, I’m convinced that this business will be just fine.
The stock market has rebounded nicely from the 2022 bear market lows, and most major indexes are within striking distance of their all-time highs. With expectations of falling interest rates, and the continued strength of megacap technology stocks, things have been going quite well for stock investors.
However, it’s important for all investors to know that the stock market will crash again — it’s just a question of when. A crash could come next month, next year, in five years, or it could come tomorrow. We have no idea, and there are many potential factors that could cause a crash. But stock market crashes are a normal part of being a long-term investor.
I aim to fill my own portfolio with stocks that should do well over the long term, regardless of whether the market crashes or not. But there’s one in particular that I’d be confident to own during a market crash, and that’s Berkshire Hathaway (BRK.A 0.67%) (BRK.B 0.54%).
A collection of recession-proof businesses
First, there are three major components to Berkshire’s business: its operating businesses, its stock portfolio, and its cash. The stock portfolio is clearly not immune from a stock market crash (although the types of stocks Berkshire owns tend to hold up better than most).
When it comes to the operating businesses, there are over 60 different subsidiary businesses. Some of them could be vulnerable to market crashes and recessions, but the largest Berkshire subsidiaries should be just fine. GEICO and Berkshire’s other insurance operations are a big business and are very close to being truly recession-proof. After all, people still pay their auto insurance when times get tough.
Berkshire Hathaway Energy is another massive component of the company and is also very recession-proof. Even in tough times, electric and gas bills still need to get paid. I could go on — BNSF Railroad, Pilot Travel Centers, and Duracell are also great examples of businesses that should perform well no matter what.
Berkshire’s cash is the key differentiator
To be fair, there are plenty of recession- and crash-resistant businesses you can invest in. There is no shortage of utilities stocks, for example. But what makes Berkshire different is its unmatched financial flexibility.
At the end of the second quarter, Berkshire had a staggering $277 billion in cash and short-term investments on its balance sheet. For the time being, the bulk of this is in Treasury securities that pay Berkshire about 5% annually.
However, if a market crash or prolonged recession comes, this cash stockpile gives Warren Buffett and his team a massive war chest to take advantage of bargains. Berkshire can use it to buy stocks that have plunged or can negotiate unique investment deals. In fact, Berkshire’s Bank of America investment can be traced back to a $5 billion preferred stock deal with warrants that Buffett negotiated in the wake of the financial crisis.
Berkshire in a market crash
Berkshire’s stock portfolio can become volatile in a crash, but its operating businesses should stay profitable, and its cash can actually allow Berkshire to emerge from a market crash even stronger than it went in.
I’m not saying that Berkshire’s stock price won’t fall in a market crash. It can, and it has in previous crashes. But the point is that the business is in a better position than that of any other large-cap company to make it through a market crash largely unscathed.
Bank of America is an advertising partner of The Ascent, a Motley Fool company. Matt Frankel has positions in Bank of America and Berkshire Hathaway. The Motley Fool has positions in and recommends Bank of America and Berkshire Hathaway. The Motley Fool has a disclosure policy.
