My simple checklist for investing during the 2020 market crash

Willing to invest for the long term? Here are one Fool’s rules for working out what to buy.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

For those with a long investing horizon, learning to swim against the market tide now could result in massive gains later down the line. With this in mind, here’s a four-point checklist I’ll be using to at least narrow my search for the best stocks.

1. Balance sheet strength

There’s a reason why this criterion takes priority over all others. With all sorts of businesses likely to suffer over the next few months (possibly years), it’s those with poor balance sheets that are most vulnerable.

At times like these, Fools need to avoid companies with high operational and financial leverage. In other words, steer clear of those with big fixed costs (relative to their revenues) and those needing to raise capital through loans and other financing options. On the flip side, companies with no debt and loads of cash are ideal.

One way to get a handle on the financial robustness of a company is to call up the latest results from its website. This information might not be completely up to date but it’s as good a place as any to start.

2. Competitive advantage

Even if a company manages to make it through the coronavirus crisis, it’s unlikely to thrive in the future if it lacks some sort of competitive advantage or, as Warren Buffett call is, an ‘economic moat‘.

Moats can be wide or narrow. I’d recommend trying to find the former. Evidence of a wide economic moat is when rivals struggle to break down a company’s market share. For some, this will be ‘intangible assets’ such as strong brands. For others, it will be innovative technology, or cheap access to raw materials.

A narrow moat, by contrast, is one that only protects a business for a relatively short period of time because the barriers to entering its market are low. 

3. Proven management

Knowing the companies I’m a part-owner of are led by prudent management teams gives me confidence that they stand a better chance than most of weathering the economic storm we face. For this reason, I think it’s important to check the track records of those in charge before investing.

The only thing better than highly competent management is highly competent management owning a decent slug of shares. Having their own wealth invested in the business should ensure their interests are aligned with the rest of us.

While significant ownership is often the case with smaller companies, it’s less common with established stock market juggernauts. For this reason, I wouldn’t automatically dismiss investing in market minnows at the current time. 

4. Reasonable price

You may think that nabbing a bargain is the most important factor to consider, particularly during the crisis in which we find ourselves. Since there are many companies out there trading on temptingly-low valuations that may actually struggle to survive, however, I respectfully disagree. Stock pickers need to be more selective than ever.

Like most things in life, you get what you pay for. As fund manager Terry Smith of Fundsmith regularly remarks, it’s what businesses actually do over many years that really matters, not the brilliance of your timing. Those that grow and reinvest their earnings at a high rate of return will be the ones to thrive.

Don’t compromise quality for price.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

More on Investing Articles

Passive income text with pin graph chart on business table
Investing Articles

Yields of up to 7%! I’d consider boosting my income with these FTSE dividend stocks

The London market has some decent-looking dividend stocks right now, and I’m tempted by these two for growing income streams.

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

I’d put £20K in an ISA now to target a £1,900 monthly second income in future!

Christopher Ruane shares why he thinks a long-term approach to investing and careful selection of shares could help him build…

Read more »

Mature couple at the beach
Investing Articles

6 stocks that Fools have been buying!

Our Foolish freelancers are putting their money where their mouths are and buying these stocks in recent weeks.

Read more »

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »

Investing Articles

1 of the best UK shares to consider buying in April

Higher gold prices and a falling share price have put this FTSE 250 stock on Stephen Wright's list of UK…

Read more »