In his 2018 Letter to Shareholders, Warren Buffett – Chairman and CEO of Berkshire Hathaway – made a very interesting comment on how he was investing at the time. At the time of writing, the US markets (as well as the ASX) were still in the midst of the longest bull run in history.
Everyone was feeling rich and wanting to get richer – much like how everyone was feeling in early February this year.
Buffett had this to say of the growing criticism of the US$132 billion pile of cash he was sitting on at the time:
"We consider a portion of that stash to be untouchable, having pledged to always hold at least $20 billion in cash equivalents to guard against external calamities. We have also promised to avoid any activities that could threaten our maintaining that buffer.
Berkshire will forever remain a financial fortress. In managing, I will make expensive mistakes of commission and will also miss many opportunities, some of which should have been obvious to me. At times, our stock will tumble as investors flee from equities. But I will never risk getting caught short of cash."
So as we enter a very trying time for the country (and the world), I think the importance of a 'financial fortress' has never been greater.
As an investor in ASX shares, you want to make sure that your tower is built on stone, rather than sand (to borrow the old parable).
Why having a 'financial fortress' is essential
Selling shares at a time like this is an act of wealth destruction. Whether you're selling because you get spooked by the market, get a margin call or because you suddenly need cash for an unexpected emergency doesn't matter from a financial viewpoint. It's all the same loss.
Many investors with a 'Buffett' mindset would be licking their lips right now at the ASX shares that have 'gone on sale'.
But this can be another danger. If you throw every last cent you can find under the bed into the markets today, you risk getting caught short if your financial situation deteriorates. You (or your partner) might lose your job or have hours reduced in the next few months. You could have a medical emergency. The list of potential "external calamities" goes on.
Having a Buffett-style 'financial fortress' is essential in my opinion before you consider investing in these trying times. You can do this by making sure you're on top of any debts that you may have, as well as building an 'emergency fund' (I myself aim for at least three months of living expenses). So as Buffett says – don't "risk getting caught short of cash".
The last thing anyone needs right now is having to sell shares against their will.
