Warren Buffett's Top Rule for Dealing With a Stock Market Crash

The market may not be facing an imminent crash. But waiting until one is underway to figure out how to keep it in perspective means you've waited a little too long. You should have the right mindset in place in advance.

There's no better way to do this than to embrace some of the wisdom regarding stock-market crashes from the man who not only survived several, but also brilliantly used them to his advantage. That's Warren Buffett, formerly the CEO and chief stock picker of Berkshire Hathaway (NYSE: BRKA) (NYSE: BRKB), which has regularly outperformed the broad market since he took the helm all the way back in 1965.

Former Berkshire Hathaway CEO Warren Buffett, the "Oracle of Omaha." Image source: The Motley Fool.

An undeniable theme

The Oracle of Omaha has actually addressed how to handle market setbacks several times, although three (very) related tips may be all you need to successfully navigate the next one. Note that each tip below lays the groundwork for the following one, leading up to Buffett's top rule.

3. "The stock market is a device for transferring money from the impatient to the patient."

This is actually more of an observation than a tip, but a key observation all the same -- every market crash so far has eventually yielded to new record highs. Some of these recoveries have materialized faster than others, but they always happen sooner or later.

The key to long-term investing success is largely just a matter of not bailing out when things get ugly. The inevitable rebound is often right around the corner, even if it doesn't feel like it.

2. "Be fearful when others are greedy, and be greedy when others are fearful."

This quote is an extension of Buffett's observation that impatient investors lose out to patient investors; it suggests how to put that idea into action. That is, when the crowd is in a fevered panic because the market is in free fall and it doesn't seem like it will ever end, start gathering some cash and making your shopping list -- because it's time to dive into beaten-down quality stocks.

You may not be buying at the exact bottom, but it's better to be early than late. Stocks tend to soar right at the beginning of major recoveries.

1. "Big opportunities come infrequently. When it's raining gold, reach for a bucket, not a thimble."

Finally, Buffett advises, don't be timid when opportunity knocks. He'd be the first to concede -- and he has -- that in his 60 years of market-beating performance as CEO of Berkshire Hathaway, only about five of those years were "really juicy" in terms of being able to scoop up quality stocks at a nice discount. If great opportunities are this rare, it's better to bet big when you can.

Think offense, not defense

All this is admittedly easier said than done. Most investors aim to minimize risk by moving cash to the sidelines when things get scary, and then only gradually ease back into the market once a rebound is obviously underway.

That's not Warren Buffett's advice, though. As uncomfortable as it may be for investors to follow his lead, Buffett has always understood that his success came from being confident that the market would eventually recover. He either embraced crashes, or ignored them.

Of course, that's much easier to do when you're 100% serious about a holding period of "forever."

James Brumley has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway. The Motley Fool has a disclosure policy.