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.
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.
Trick No. 4 – Prepare for Volatility
While No. 4 is not one of Warren Buffett’s tricks for success, it’s a great way to hedge for potential volatility in a crazed market. Three of the best ways to hedge is by using:
ProShares Ultra VIX Short-Term Futures ETF (UVXY) -- As volatility ticks higher with the trade war, ETFs such as the UVXY run higher. ETF was designed to match two times (2x) the daily performance of the S&P 500 VIX Short-Term Futures Index.
VelocityShares Daily 2x VIX Short-Term ETN (TVIX) -- The TVIX is another great way to trade elevated volatility. This ETF tracks an index of futures contracts on the S&P 500 VIX Short-Term Futures Index. As volatility ticks higher, the TVIX ticks higher.
iPath S&P 500 VIX Short-Term Futures (VXX) - As volatility returns, one of the best ways to profit from volatility is with the VXX ETN, which provides exposure to the S&P 500 VIX Short-Term Futures Index Total Return. In simple terms, as volatility shoots higher, so does the VXX.