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While it's been far from a smooth ride, stock market investors have had plenty of success over the last few years. Behind a booming artificial intelligence trade, the S&P 500 (SNPINDEX:^GSPC) has gained nearly 115% since the fall of 2022, while the Nasdaq Composite (NASDAQINDEX:^IXIC) has jumped more than 150%.
But the last couple of weeks have stung: The S&P 500 is down 3% over the past month, while the tech-heavy Nasdaq is down 7%.
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Many investors are uneasy. There's a lot of noise right now. It's natural. So, it seems to me that now is the perfect time to consider some sage advice from one of the most successful investors of all time: Warren Buffett.
Crashes happen in the stock market. They're a fact of life. They cannot be avoided, but what you do -- or don't do -- when one happens makes all the difference in the long run. It turns out that the latter half of one of Buffett's most famous aphorisms is one of the most important pieces of advice to keep in mind.
This simple phrase could help you avoid the costliest mistake you can make during a crash -- panic selling -- while remembering not to overlook the opportunity in front of you: the chance to buy shares of great businesses at a discount.
Buffett himself demonstrated this during the financial crisis. In September 2008, Berkshire Hathaway invested $5 billion in Goldman Sachs, receiving preferred shares paying a 10% dividend and warrants -- which turned into roughly $3.2 billion in profit. Buffett's $5 billion Bank of America investment in the wake of the crisis turned into a $12 billion on-paper profit six years later.
Of course, you have to be careful. Not all stocks are created equal, and crashes tend to weed out companies that weren't sound to begin with. Just because the market as a whole will inevitably recover does not mean that individual stocks will.
It's worth keeping another Buffett quote in mind: "Charlie (Munger) and I are not stock-pickers; we are business-pickers." Investing in companies with durable competitive advantages, good economics that don't implode when the economy slows down or funding dries up, and led by competent leaders will help ensure the stock recovers when the dust settles.
I don't know whether the last couple of weeks are the start of something bigger or just a bump in a long rally -- no one does. But if stocks do keep sliding, keep doing what you were (hopefully) doing before: steadily investing in a diverse set of strong businesses and holding for the long term.
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Bank of America is an advertising partner of Motley Fool Money. Johnny Rice has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway and Goldman Sachs Group. The Motley Fool has a disclosure policy.
If a Stock Market Crash Is Coming, Warren Buffett's 6-Word Advice Is the Smartest Move You Can Make was originally published by The Motley Fool
