The US stock market plunged again yesterday and, as usual, the FTSE 100 index started to follow. Indeed, we could be heading for another stock market crash like the one in the spring.
But should I worry about the regular setbacks we see on the stock market? After all, I admit that when the main indices are falling, it doesn’t feel like a good time to invest in shares.
Why I’m not fearing another stock market crash
However, not all shares fell yesterday. Some went up, such as AstraZeneca, N Brown, Superdry and Victoria. And that underlines the fact that the indices contain many stocks, each with their own underlying business.
Indeed, some businesses are thriving even though the coronavirus continues to affect the general economy. And I’m keen to buy the shares of good-quality businesses. If the stock market marks down their shares, there could be an opportunity to buy at better prices.
If I can identify strong businesses and separate them from weaker enterprises, ongoing stock market weakness now could be an opportunity. And a good quality operation will likely show a decent profit margin, good inflows of cash, a generous return on invested capital, and a reasonable level of borrowings. If I begin with those figures I could find better value if the share price has fallen.
Well-known billionaire investor Warren Buffett has a history of buying the shares of quality businesses when the stock market is weak. By doing so, he often benefitted when the businesses and shares recovered and grew over time. But he had to go out shopping for shares when things looked gloomy. And I think we have conditions like that today.
Underlying quality and value
If I take a long-term approach to buying and holding shares in firms with good quality underlying businesses, I can think of myself as a part-owner in the enterprise. And by doing that, I reckon there’s a better chance for me to convert market setbacks and weak share prices into good long-term investments.
So I think with a long-term mindset, weakness in the FTSE 100 and the wider stock market could be good news if I’m well-prepared. But I’d consider buying a slice of the whole market in times of weakness as well. To do that, tracker funds would be ideal. I can target a fund that follows indices such as the FTSE100, FTSE 250, or America’s S&P 500 and at low cost in terms of transaction charges. But I’d be sure to select the accumulation version of each tracker fund so that my dividends are automatically rolled back in.
In that way, I could be on my way to compounding my investment, which is a key process when aiming to build wealth. If I invest regularly, the process of pound-cost averaging could help me turn stockmarket setbacks into an advantage. And long-term gains could follow.
