If a Market Crash Is Coming, Here’s a Piece of Warren Buffett Wisdom That You Should Follow

No one likes to think about market crashes or experience one. But these happenings do take place from time to time and are part of the long-term investing picture: If you invest over many years, you're likely to encounter bull markets as well as bear markets and even market crashes. But the good news is that, when you hang on for a number of years, the good times more than compensate for the bad. After all, the S&P 500 has delivered an average annual return of 10% over time, making it a winning investment.

With all of this in mind, it is a smart idea to consider what you should do the next time the market crashes. If you have a plan, you'll feel more comfortable during those tough market times -- and set yourself up for investing success. And who better to look to for advice than investing superstar Warren Buffett?

At the helm of Berkshire Hathaway for six decades, the billionaire delivered market-beating returns. Though Buffett retired from the chief executive officer position at the start of the year, he remains chairman and continues to share his thoughts on investing. Now, let's consider a piece of Buffett wisdom you should follow if a market crash is coming.

Image source: The Motley Fool.

What the S&P 500 is doing now

First, let's take a look at the current stock market environment. The S&P 500 advanced in the double digits over each of the past three calendar years and is continuing the trend this year as it heads for a gain of about 11%. Over most of this time, artificial intelligence (AI) stocks have led the movement, with investors excited about the potential of this technology.

But, in recent months, certain headwinds have temporarily interrupted the momentum. Some investors have grown cautious about AI, worrying about the pace of spending by big tech companies. This has put the brakes on the stock performance of some of these players, and as a result, weighed on the S&P 500. Tech stocks such as Nvidia and Microsoft are among the most heavily weighted in the index. Meanwhile, investors have also expressed concern about the ongoing conflict in Iran as well as higher inflation in the U.S. All of these elements have slowed the S&P 500's march upward.

Valuations remain high overall, with the S&P 500 Shiller CAPE ratio hitting a high it's only surpassed once before in history. This inflation-adjusted metric measures prices in relation to earnings per share, so it offers a clear picture of whether stocks are expensive or cheap -- and today, they remain expensive.

S&P 500 Shiller CAPE Ratio data by YCharts

Buffett doesn't follow the crowd

That said, a market crash could change this relatively quickly. And this is where Buffett's words of wisdom come in. First, it's important to note that Buffett doesn't follow the crowd or market environment when he invests. By this, I mean he doesn't rush to get in on the most popular stocks or to buy during a bull market, and he doesn't avoid buying stocks when they decline. In fact, Buffett says that many investors get one important point wrong when investing: They don't like seeing stock prices fall.

"Only those who will be sellers of equities in the near future should be happy at seeing stocks rise," Buffett wrote in his letter to shareholders in 1997. "Prospective purchasers should much prefer sinking prices."

When Buffett has been "greedy"

And in his 1986 letter to shareholders, Buffett shares a secret of Berkshire Hathaway's success: "We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful."

We can apply both of these points to a market crash, and the following advice emerges: During crashes and general market downturns, long-term investors shouldn't panic -- instead, they should seek out buying opportunities. Many quality companies will trade at a discount, offering fantastic opportunities that may lead to incredible gains over time.

So, if a market crash is coming, follow this Buffett wisdom: Don't worry about falling stock prices and instead use this as a time to get in on, for a bargain, solid companies that have proven themselves and have bright prospects. Though you may see some short-term declines on paper, quality players are likely to rebound and gain. This means, over time, this strategy could deliver great results -- as it's done for Buffett.

Adria Cimino has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway, Microsoft, and Nvidia. The Motley Fool has a disclosure policy.