Another major stock market crash is on the way. It's a certainty. What isn't so certain, though, is exactly when it will happen.
But the market experiences a downturn of at least 20% more often than you might think. Two of the biggest stock market crashes in history have occurred in the last 13 years.
Most stocks plunge during a market meltdown. There are some exceptions, though. And some stocks that fall emerge on the other side of the sell-off stronger than ever.
The right mindset
Market crashes can be scary if you focus on the short term. However, it's a different story altogether if you have a long-term perspective. The right mindset allows investors to see a huge market sell-off as an opportunity. Berkshire Hathaway's Warren Buffett definitely has such a mindset.
Buffett's view can be summed up in one thing he said in his latest letter to Berkshire shareholders: "Never bet against America." You could also use the affirmative version of that statement: Always bet on America. This has been one of Buffett's most important guiding philosophies in leading Berkshire Hathaway through the years.
The legendary investor didn't become one of the wealthiest people in the world by just being patriotic, though. There's also another important part of Buffett's mindset that's evident in his statement to "be fearful when others are greedy and greedy when others are fearful."
Stock market crashes cause most investors to be fearful. As a result, they often sell stocks at bargain prices. That presents a gift to "greedy" investors like Buffett, who buy those stocks and have the patience to hold them until they recover. Much of Berkshire Hathaway's success has been from buying high-quality stocks at opportune times and keeping them for years as they accumulate big returns.
Plenty of dry powder
Just having the right mindset isn't enough, though. You can fully understand the tremendous buying opportunity that a stock market crash presents. But that doesn't accomplish anything if you don't have enough cash to invest.
That leads me to the second main reason why Berkshire Hathaway could be the biggest winner of the next stock market crash: Its massive cash stockpile. Berkshire ended 2020 with cash, cash equivalents, and short-term investments totaling $135 billion.
Only Alphabet claims a bigger cash stockpile than Berkshire, with a cash position of close to $137 billion. However, the tech giant doesn't invest in other publicly traded companies like Berkshire does.
Berkshire has so much dry powder at its disposal that it could buy major stakes in a lot of companies in the next market crash. For that matter, it could fully acquire multiple companies if it chose to do so. Right now, nearly 440 members of the S&P 500 have market caps that are less than Berkshire's cash stockpile.
A second chance
There's one other thing to consider: Berkshire didn't use a lot of its cash during the coronavirus market crash last year. Buffett's longtime business partner Charlie Munger explained why by comparing the crash to a natural disaster. He told The Wall Street Journal that Berkshire just wanted to "get through the typhoon."
That's understandable, to some extent, during a once-in-a-generation scenario like the COVID-19 pandemic. However, I suspect that Buffett and Munger wished, in retrospect, that they had bought some stocks during the big sell-off. If they had, Berkshire stock would have probably performed much better over the last 12 months than it has.
The next stock market crash, though, probably won't be such an anomaly. That could give Buffett and Berkshire a second chance to buy great stocks at attractive prices. My prediction is that, whenever the next major market downturn occurs, Berkshire will put its big cash stockpile to work. And when the market rebounds (as it always does), Berkshire Hathaway should emerge as a big winner.