If we can learn one lesson from Benjamin Graham’s Intelligent Investor, it’s this: buy stocks cheaply. At the moment, his advice is proving difficult to follow. The S&P 500, despite America’s coronavirus complications, inflation worries and foreign policy blunders, still marches around record highs. The index is crammed with heavy blue-chip tech stocks and an enormous amount of government stimulus, both of which complement its ever-rising valuation.
But we knew all of this already. In the last few days, though, it has wobbled for a different reason, and this could be signalling the dreaded correction that has loomed in the background behind 2021’s remarkable bull run. The reason? Experts are worried. It is often said that the market runs on emotion, and rumours are beginning to circle around Wall Street that a crash may occur before the end of the year – here, fear spreads like fire.
While it’s generally advised to ignore the daily hubbub of the market in favour of long-term gains, here at The Motley Fool we aim to avoid crises before they happen (and of course, make the most of fire sales). With that in mind, here’s my strategy that I’m organising before the market corrects.
Like many others, each month I buy a portion of the S&P 500 tracker fund. I’m planning to cut my payment right down to the bare minimum, opting instead to purchase the relatively fairer-valued FTSE All-Share Index. Why? I believe the US tech stocks are at the greatest risk of correction in a market crash, while the UK (for better or worse) lacks any of these giants. The FTSE All-Share, unlike the S&P, has not experienced the same scale of rapid growth since 2020 and so should be shielded from the worst effects of a downturn – in effect, there’s less to lose. This is only a temporary measure, but at present I don’t want to continue overpaying for American stocks if their value is going to wipe out soon.
Somewhat counterintuitively, it is also helpful to think of stock market crashes as flash sales. Warren Buffett has always styled himself as a ‘net buyer’ of stocks with a ‘holding period of forever’. Like any other product, then, paying at a discount is always encouraged. Stock market crashes provide brief periods of remarkable purchasing opportunity amidst a wider climate of pessimism, and for this reason I am keeping holding back some cash in order to pounce on the next dip and seize my desired companies from the bargain bucket.
Going against the grain of popular opinion can be a great way to make money in the market, and when the world is telling me to sell, I will turn my headphones up louder and purchase more stocks. Bring it on!
