The possibility of a second stock market crash in 2020 hasn’t gone away. And I can understand how the threat of another crash makes people nervous about investing in the stock market.
A second stock market crash could be an opportunity
But some of the best share bargains arrive in times of uncertainty. Indeed, famous US investor Warren Buffett has achieved extraordinary returns by buying the stocks of strong underlying businesses when they are out of favour with investors.
The second part of Buffett’s strategy involves holding onto his shares for a long time. And that means riding the ups and downs of the market, including any further stock market crash that may arrive in 2020. The idea is to hold until you realise the full potential of the underlying enterprise. Often, growth and operational progress will cause the share price to rise. It could also fuel a growing stream of shareholder dividends.
But Buffett isn’t the only investor to pursue such a strategy. Early on, growth investor Philip Fisher influenced Buffett to adopt a long-term perspective. And his ‘partner’ Charlie Munger also helped persuade him to hold quality shares for a long time.
Indeed, Buffett’s earlier strategy involved focusing on cheap, undervalued businesses and buying their shares for a relatively quick bounce-back gain. Often, the quality of the underlying business was lacking. So those stocks weren’t suitable for a long-term hold.
Impressive returns
Most of Buffett’s billions have come from the long-term, quality business strategy that he follows now. And many have copied his approach. For example, I recently wrote about Nick Train of fund management company Lindsell Train. His technique chimes with Buffett’s because he holds the shares of quality businesses through “thick and thin.” And, over the past 20 years, Train’s performance has been impressive. He’s delivered his fund investors returns measured in hundreds of per cent.
One thing that both Buffett and Train didn’t do was to sell any of their quality shares when the stock market crash arrived in the spring. Although, in fairness, Buffett did sell his holdings in the airlines. But an airline isn’t a high-quality business. Buffett himself had been telling us that for years.
So central to my plan for handling a second stock market crash is to make sure strong, high-quality businesses back the shares I’m holding now. Indeed, if there’s anything in my portfolio that doesn’t attract my full conviction, now’s the time to chuck it out.
Step two of the plan is to focus on a long-term investment period. If I aim to hold my shares for 20 years, say, another crash in 2020 will become a short-term setback.
The final step is to prepare a watch list now of quality shares I’d like to own one day. Then, if a second crash does arrive, I can potentially buy some of those quality shares while the market is marking them down to a lower price.
