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Crash Insurance

Do you have crash insurance? I am not referring to car insurance; I am talking about portfolio insurance for when the stock market crashes. You’re probably wondering how to buy crash insurance. You can’t purchase crash insurance, but there are concrete measures you can take to strengthen and protect your portfolio.

If you could predict the future and knew there was a very high chance you would get in a car crash if you continued on the road you were on, my guess is you would choose an alternative route to get to your destination. Now, what if you knew a market crash was coming? Would you choose an alternative path for your investments?

Warren Buffett’s nickname is the “Oracle of Omaha” because of his uncanny ability to choose the right investments. Most people know who Warren Buffett is, but many have never heard of Charlie Munger, the 98-year-old vice chairman of Berkshire Hathaway. Charlie Munger is Warren Buffett’s right-hand man and is considered by many to be one of the greatest investors of all time and Buffett’s trusted investment whisperer.

At the Daily Journal’s recent annual meeting, Charlie Munger predicted that a painful crash was coming. Speaking of the rampant market speculation fueled by COVID stimulus checks, here’s what Munger had to say about the state of the market:

What we’re getting is wretched excess and danger for the country. Everybody loves it because it’s like a bunch of people getting drunk at a party; they’re having so much fun getting drunk that they don’t think about the consequences. Eventually, there will be considerable trouble because of the wretched excess; that’s how it usually worked in the past.

Charlie Munger has been around for 98 years, so he probably knows a thing or two about market cycles, and in the past, he’s usually been right about these things. So, if he says a painful crash is coming, we should probably heed his warning.

So, if you can count on a painful stock market crash and you’re driving along Wall Street trying to get to your retirement destination or some other investment destination, shouldn’t you consider an alternate route?

With all this talk about a potential market crash, you have all kinds of pundits coming out of the woodworks telling you why they’re not worried and what you can do to give yourself crash insurance.

​​Most of these pundits are wrong, and their advice will be deadly because if all their advice amounts to is changing lanes to avoid a crash down the road, their advice will be worthless to protect you from a crash that will wipe out everything no matter what lane you’re in.

The people you should be listening to are the people who always have crash insurance…

​​Why? Because they’re always prepared. Like people who avoid certain roads in their communities where frequent crashes occur, smart investors avoid the one investment road where frequent crashes occur – Wall Street.

Smart investors invest in private alternatives to avoid stock market crashes. They choose alternative paths because they have a different destination than everyone else. While the masses chase yield (i.e., buying low and selling high), smart investors have higher objectives – objectives that have always served them in good times and bad.

What do smart investors do to give themselves crash insurance?

  • They invest in alternatives backed by tangible assets.

  • They invest for the long term in assets acquired in private markets insulated from herd behavior.

  • They invest for passive cash flow.

  • They invest in assets where the underlying value reliably appreciates over time (e.g., real estate and productive businesses).

  • They leverage the expertise of others to invest passively and generate multiple streams of income.

  • They leverage the tax laws to avoid and reduce taxes legally.

You can’t buy crash insurance, but you can follow the lead of smart investors who have always been successful at avoiding or mitigating the pain of market crashes.

​​This often involves staying off Wall Street, and it’s what investors should consider if they want to heed Charlie Munger’s warning.

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