Is your money safe from a US stock market crash?

The best temperament for an investor is serenity. While others fear the crash, buy and snap up bargains. If others are greedy, then sell and take home your profit. But what do you do when everyone’s afraid, but markets keep going up? I saw this interview from Robert Shiller that shook my serenity. After all, I’m not as smart as the nobel-prize-winning, Yale economist. Still, I don’t think the US market is about to crash.

Though p/e ratios are historically high, interest rates are historically low and look set to stay there (see my post on jobs, interest rates and quantitative easing). As long as markets expect low-to-normal nominal GDP growth, US market valuations don’t look completely out of whack. If nominal growth speeds up, that growth will increase corporate earnings, bringing valuations back to normal. If growth drops and we get deflation, there will be a temporary crash, then a strong recovery as the Fed does QE4, but keeps us expecting inflation between 0%-2% for the long term.

Still, I can’t shake the feeling that American equities are at least due for some sort of correction. In searching for safe havens, I did a post on the five safest countries for your money. Shiller is on a similar page in thinking of Italian or Spanish ETFs, but a Grexit would put enormous pressure on those countries as capital fled expecting the next domino to fall (there’s always a reason for cheap valuations). Victory by a left-wing party in either country (not far-fetched by any means) would bring the German ultimatum (austerity or no Euro) down like the executioner’s ax.

But in the largest, most liquid stock market on earth, there must be safe places to hide. It turns out there are. The greatest value investor of all time, Warren Buffett, has failed to beat the market over the last five years. The reason? His investments do better when the S&P falls. For proof, just look at the first table in his 2013 letter to shareholders. Whenever the S&P 500 falls, or even crashes, he seems to do alright.

As human beings, we have a psychological predisposition to see a trend and jump on it. Because Buffett’s investments haven’t performed as well recently, we think his time on top is over. We’re ready for the next money manager, one who has beaten the market recently. But different types of stocks move in different cycles. Value investments like Buffett’s will do worse when the market does really well (like recently). But if there’s a crash, then value investing will make a big comeback.

Where are the best places to hide within Berkshire Hathaway’s portfolio?

• Wells Fargo (WFC): Banks have been very conservative in recent years, and trade at very good valuations for investors. Wells Fargo in particular is poised to take advantage of easier credit conditions. See my past post on banks and monetary policy.
• Coca Cola (KO): Coca Cola is one of those companies that just isn’t going away. As an asset you can hold forever, it will provide a lot of safety in a turbulent market. Also, with almost a 3% dividend, you’ll beat any “safe” investment in government bonds. See my past post on industries about to be upended.
• Wal-Mart (WMT): Like Coca Cola, Wal-Mart could be around forever. It has a competitive advantage in cost that’s nearly impossible to replicate, because it’s due to supply chain scale. Combine that with a more attractive valuation than Coca Cola (and a better-than-2% dividend), and this one is hard to pass up.
• Chicago Bridge & Iron (CBI): This caught my eye as one of Buffett’s rare losers. With a very attractive valuation (albeit with a spate of bad news on a nuclear reactor contract), CBI is down almost 50% over the past year. But bad news for others is good news for me. However, if you’re too certain on CBI (never be too certain of anything), do read up on the risks at this excellent article.
• Verizon (VZ): Telecoms stocks are like bonds. They offer low growth, high dividends, and a great place to hide money if you think the market will tank. I think there’s a good case for AT&T (T) over Verizon, but this is a profile on Berkshire Hathaway holdings, and VZ will offer great returns in a turbulent market.
• General Motors (GM): From my past article on car stocks, I really like Toyota (TM). From past history and revenue trends (even excluding the fact that GM went bankrupt not long ago), I still think Toyota has a better chance of lasting forever than GM. But if you want to play the contrarian, GM has very strong cash flows and looks very cheap.

So if you’re looking for a place to hide, there are stocks right here in America where you can stash your money if you think a major correction is likely. All of the above are owned by America’s most-trusted businessman. And they all offer a combination of attractive valuation, strong cash-flows and a hard-to-beat competitive advantage.