How to prepare for an S&P 500 crash

A study by Citrini Research this week set out the potential implications of artificial intelligence (AI) for the US economy, and it shook the S&P 500. The responses were fascinating to watch.

I’ve seen analysts ignore the issue, say it won’t happen because it would be bad, and try to compare it to entirely different situations in the past. Those are all bad strategies. So I’ve got a better one.

The AI apocalypse

The basic worry in the Citrini publication is a familiar one. It’s that AI might create a self-reinforcing cycle of job losses, weaker consumer spending, lower corporate profits, and so on.

What the piece really sets out is just how bad things could get. And in the worst-case scenario, there’s no way share prices in the S&P 500 are going to hold up at their current levels.

The stock market fell after the piece was published, but a lot of analysts were quick to dismiss it. The trouble is, a worrying number of them are unable to make any coherent case in support of their view.

One of them argued that the US economy can cope with AI job losses because it’s survived disruption before. And cited as evidence… the fact that lifts are now automatic and don’t have manual operators!?

I’m not honestly sure whether the point was meant to be serious, but I’m not sure it’s anything to joke about. And elevator operator spending was never 80% of the US economy.

Anyone thinking of investing in the stock market needs to think about what could go wrong in the next few years. But instead of hoping it won’t happen, why not make a plan for if it does?

Survival of the fittest

The companies with the best chances of surviving an AI apocalypse are the ones with strong balance sheets and big competitive advantages. And there’s one obvious name that comes to mind. 

Berkshire Hathaway (NYSE:BRK.B) isn’t insulated from AI. In fact, it increases one of the biggest risks for the firm – a major insurance liability coming from a cybersecurity attack.

The company however, isn’t ignoring this or pretending it won’t happen based on nothing but hope. It’s making sure it has the cash reserves that will put it in a position to adapt and survive.

Berkshire’s strong financial position also benefits the firm in other ways. It means its other subsidiaries – including its railroad and its utilities business – are in a stronger position than their rivals.

Investors often focus on the company’s stock investments. But the deals that interest me most are the ones that aren’t available to others, like buying a chemicals business from Occidental Petroleum.

That kind of opportunity is unique to Berkshire. And combining that with a strong case for thinking the firm has a better chance to survive an AI apocalypse makes a strong case to consider buying.

Being ready

Exactly what the implications of AI are going to be for the US economy will become clearer over time. But those who pin their hopes on blind optimism are playing a very dangerous game.

More importantly, there’s no need to. A much better strategy is to find companies that take potential risks seriously and make preparations to deal with them if and when they show up.

The post How to prepare for an S&P 500 crash appeared first on The Motley Fool UK.

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Stephen Wright has positions in Berkshire Hathaway. The Motley Fool UK has recommended Occidental Petroleum. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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