The stock market crash could be far from over. In April, the UK’s economy contracted by a record 20% as a result of the coronavirus pandemic.
Market corrections can be expected fairly regularly. But for many of us, this was the first time we had seen the index plummet as investors.
In times like these, I like to turn to the advice of someone who has seen multiple market crashes and made much of his wealth from out-of-favour stocks.
Be greedy
In the year to date, the FTSE 100 has dropped by almost 17%. In March alone, the index fell by 18%.
Like most investors when previously buying shares, the possibility of a future global pandemic never crossed my mind. Then the coronavirus outbreak struck, and countries faced varying degrees of lockdown measures. Out of nowhere, businesses were affected in ways that were unthinkable in the past. Understandably, many people were frightened and started selling off their stocks and shares.
When the stock market started to tumble, Warren Buffett’s wise words rang in my ears: “Be fearful when others are greedy, be greedy when others are fearful”.
When the market index is crashing, it takes a lot of faith to think that stocks will recover. However, I believe it is worth remembering that since the inception of the FTSE 100 in 1984, it has fallen numerous times. In the years following, it has always recovered. Why should now be any different?
Investing for the long term
It is also helpful to remember that investing in stocks and shares is a long-term game. No one can predict how the economy will perform over the next few months or years.
If you are investing with a horizon of a couple of decades, short-term fluctuations might be better thought of as an opportunity to buy quality shares at bargain prices.
As Warren Buffett said: “Buy a stock the way you would buy a house. Understand and like it such that you’d be content to own it in the absence of any market”.
If you are purchasing a house, its future value might only be a side thought for you. I would consider stocks and shares with the same outlook.
Hold your nerve like Warren Buffett
When the market crashes, it is tempting the consider following the crowd and selling your shares. However, by doing this, you are turning any paper loss into a realised loss.
Instead, it is worth considering why you bought the stocks in the first place. If the fundamentals of the company have not changed, then I would retain my position.
Sometimes it pays to go in a different direction to the masses. I like to remember this Warren Buffett saying: “Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it”.
The next stock market crash?
At some point, the stock market will probably crash again. Maybe this year, but possibly not. No one knows.
For long-term value investors, a market crash might not be a bad thing. After all, the opportunity to buy shares in quality companies at a reduced price does not happen often. When it does, it pays to be ready.
