If a Stock Market Crash Is Coming, Take This Advice From Charlie Munger

Goldman Sachs prime-brokerage data show hedge funds are shorting stocks at their highest level in nearly five years, amid concerns about interest rates, high oil prices, AI-trade weakness and the Iran war. The article cites Charlie Munger’s advice to tolerate market declines, noting the S&P 500 has averaged roughly 10% annual returns since 1957 and that corrections of at least 10% and bear markets of at least 20% are recurring features of investing. It argues long-term investors can stay invested through sell-offs and use crashes as opportunities to buy equities at better prices.

Analysis

The positioning signal is more useful as a warning about squeeze risk than as a crash forecast: prime-broker shorts may include hedges, and crowded shorts can amplify a rebound if rates or geopolitical risk ease. The article’s key blind spot is that long-horizon patience does not neutralize valuation, earnings, or liquidity risk; investors with leverage or near-term liabilities cannot simply wait out a drawdown. For the next 1–3 months, track whether equity weakness broadens alongside rising real yields, widening credit spreads, and downward earnings revisions. That combination would make the short positioning more informative and raise downside convexity; easing yields or improving revisions could instead trigger a sharp short-covering rally. Over 6–18 months, persistent capex monetization and earnings delivery—not confidence in a long-run market average—will determine whether AI-heavy exposure deserves its premium. Berkshire Hathaway may be a relative defensive candidate, but the supplied facts do not establish its current valuation, cash position, or downside protection. No compelling outright crash trade follows from this article alone.

Key Decisions for Investors

• Avoid using elevated hedge-fund shorting alone to initiate a broad-market short. Treat it as a catalyst-risk flag; falsify the bearish case if real yields stabilize, credit spreads remain contained, and earnings revisions stop deteriorating.
• For long-only portfolios, add broad equity exposure in tranches on weakness rather than making a one-time dip-buy. Keep the plan conditional on liquidity needs and leverage; a prolonged earnings contraction would invalidate the patience-only thesis.
• Watch a conditional relative-value trade: consider BRK.A versus a high-duration, AI-heavy equity basket only if Berkshire’s relative strength and valuation support the defensive thesis. Verify current valuation, operating results, and portfolio exposures first; exit if Berkshire underperforms while the basket’s earnings outlook improves.
• Reassess over the next 1–3 months using breadth, real yields, credit spreads, oil, and company guidance. A short-covering rally is a meaningful risk to bearish positioning; sustained spread widening and broad guidance cuts would argue the selloff is not merely technical.