If a Stock Market Crash Is Coming, Warren Buffett Says This Is the Smartest Move Investors Can Make

After a year of record-breaking gains, major market indexes are wobbling. The S&P 500 (SNPINDEX: ^GSPC) has fallen by nearly 2% over the last week, as of this writing, while the tech-heavy Nasdaq Composite (NASDAQINDEX: ^IXIC) is down by more than 4% in that time.

Much of the sell-off is stemming from the tech sector, with artificial intelligence (AI) spending under the microscope. Rising bond yields have driven up borrowing costs, making it more expensive for AI hyperscalers to continue building data centers and related infrastructure. If big tech companies pull back on AI spending, it could cause a ripple effect across the broader market.

At this point, it's too soon to tell whether this volatility is a blip on the radar or the beginning of a deeper drawdown. Regardless of what's coming, though, Warren Buffett has one tried-and-tested strategy that can set your portfolio up for success.

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An industry's potential has limits

In a 1999 essay for Fortune, Warren Buffett issued a warning to investors. The stock market was reaping the rewards of the dot-com boom, with the S&P 500 surging by nearly 200% over the previous four years, but Buffett predicted stock prices would fall.

He also emphasized that when an industry is poised to transform society, it's especially important to choose your investments carefully. Buffett mentioned airlines as an example, noting that while air travel itself has had a monumental impact on our lives, 129 airlines had filed for bankruptcy over the previous 20 years.

Buffett's 1999 warning eventually rang true, as the dot-com bubble officially popped in early 2000 -- leading to a bear market that would last more than two years. Hundreds of tech stocks crashed and burned, despite the internet's revolutionary impact on the world.

Buffett's best advice for investors right now

"The key to investing is not assessing how much an industry is going to affect society, or how much it will grow," Buffett said in the Fortune essay, "but rather determining the competitive advantage of any given company and, above all, the durability of that advantage."

When the dot-com bubble burst, overvalued stocks crashed the hardest. These companies earned explosive returns when the bubble was building, but many had unsustainable business models, poorly managed finances, or inexperienced leadership teams that couldn't navigate the bear market.

^IXIC data by YCharts

Now, we could be facing a similar situation. AI, as a technology, could transform the world. But not every company in the AI space will thrive. Many tech stocks have seen eye-popping returns this year, but it's likely that at least a few of them have been driven by hype and are overvalued right now.

This doesn't mean that all stocks will struggle over time, though. Since the start of the dot-com bear market in March 2000, for example, the S&P 500 has soared by more than 715%. While many companies failed, some tech stocks of the era -- like Apple, Amazon, and Microsoft -- went on to become industry-leading giants.

^SPX data by YCharts

Overvalued stocks from weak companies will be hit the hardest whenever the next bear market arrives. Companies with strong fundamentals and a durable competitive advantage, however, have the best chance at recovering and going on to earn positive long-term returns.

The single best move investors can make right now is to load up on quality stocks. The healthier your portfolio, the more likely it is to survive even a severe downturn. In Buffett's words: "The products or services that have wide, sustainable moats around them are the ones that deliver rewards to investors."

Katie Brockman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon, Apple, and Microsoft. The Motley Fool has a disclosure policy.