Warren Buffett's $334 Billion Warning to Wall Street Is a Critical Lesson for Investors. Here's What to Do If the Stock Market Crashes.

Over the course of the last few years, Warren Buffett has slowly amassed the largest reserve of cash and equivalents his Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B) has ever had on its books. While the now-$334 billion he has sitting on the sidelines makes more sense in the face of an uncertain market, Buffett began growing the reserve in earnest when things looked a bit different from today. The S&P 500 is down more than 10% since February, and many fear the possibility of a market crash.

Berkshire has been a net seller of equities since 2022, but in early 2024, the activity accelerated, and Berkshire's cash pile nearly doubled in just a year, reaching today's lofty sum. Buffett's choice to grow his cash reserves while the market marched upward and optimism dominated was a warning to anyone on Wall Street who cared to look. The first half of Buffett's classic aphorism would seem relevant here: "Be fearful when others are greedy..."

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Although it's impossible to know Buffett's motivations with certainty -- there are, admittedly, other reasons why he may be growing such a large cash reserve -- what seems most likely to me (and why I call it a warning) is that Buffett grew uneasy with the state of the market and wants to position himself to not just survive, but thrive in a down market.

How amassing cash helps with the first motivation -- to survive -- is probably obvious, since having less invested in the market when it drops means you lose less, but the second -- to thrive -- is maybe less so.

Buffett has a history

Here's where the latter half of Buffett's famous line comes in: "Be fearful when others are greedy, and greedy only when others are fearful." If the worst should happen, Berkshire is positioned to scoop up stocks at a steep discount. This, as it turns out, is exactly what he did in the wake of 2008.

Buffett made several key investments in major institutions like Goldman Sachs and Bank of America after the Great Financial Crisis had ravaged their stock prices and left some teetering on the edge of bankruptcy. In just two years, Berkshire had profited $2.5 billion off of the $5 billion it invested in Goldman Sachs, and when Berkshire exercised the warrants it was offered six years after it had invested $5 billion in Bank of America, the on-paper profit (Buffett chose to keep his investment, rather than sell) was a whopping $12 billion.

Buffett wants Berkshire to be able to do the same the next time things go south, hoping to repeat the success he found in 2008. And that's not just based on a hunch -- he's said as much, although he frames it in more altruistic terms. In his 2023 letter to shareholders, Buffett wrote: "Berkshire can handle financial disasters of a magnitude beyond any heretofore experienced. This ability is one we will not relinquish. When economic upsets occur, as they will, Berkshire's goal will be to function as an asset to the country."

The lesson at hand

Now here's the thing: Maybe you're thinking this is all well and good, but I can't afford to keep a meaningful chunk of money out of the market, on the sidelines, waiting for a major opportunity. That's completely fair. It's also not the most important lesson here.

The most important lesson is this: Do not sell (in a panic). Buffett would not have the opportunity to invest as he did and net billions if most investors had not sold in a panic. A buyer needs a seller. Don't be the seller -- this assumes, of course, that you're invested in good businesses that you believe in long term, not the latest meme stocks.

If the market crashes, the worst thing you can do is to sell. It may seem obvious when emotions are not running high -- buy low, sell high, right? But when the juices are flowing and you are seeing nothing but red, logic goes out the window.

Just remember: This too shall pass. I'll spare you another cliche, but the point stands: The market will recover, and so too will your portfolio -- if you hold on.

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Bank of America is an advertising partner of Motley Fool Money. Johnny Rice has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bank of America, Berkshire Hathaway, and Goldman Sachs Group. The Motley Fool has a disclosure policy.