Stock market crash: here’s why falling prices is good news

Over in the US, a stock market crash is battering high-priced stocks. But I see falling shares as an opportunity to buy into great companies at low prices.

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On this side of the Atlantic, 2022 has been fairly calm for the stock market. So far this year, the UK’s FTSE 100 index has actually added 5.44 points since 31 December, racking up a tiny gain of 0.07%. So there’s been no stock market crash in London, despite sentiment turning deeply negative elsewhere.

The US stock market crash

Meanwhile, on the other side of the ocean, share prices have turned deeply red in New York. Indeed, the US market is already suffering a full-on stock market crash. Generally, a bear market is defined by a fall of a fifth or more from a previous high. The S&P 500 index hit an all-time high of 4,818.62 points on 3 January 2022. At Friday’s intra-day low, it dived to 3,810.32. That’s a slump of more than 1,000 points — or 20.9% — since this year’s record high.

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But the US stock market crash is most visible among highly rated tech stocks. For example, the Nasdaq Composite index hit its all-time high of 16,212.23 points on 22 November 2021. On Friday, it closed at 11,354.62 points. This means the the index has lost 4857.61 points, crashing by almost exactly 30% in under seven months. Zoinks.

Why I don’t fear bear markets

Having survived the 1987, 2000-03, 2007-09 and 2020 market meltdowns, I no longer fear stock market crashes as I once did. Why? Because I recognise that falling markets provide great opportunities to build future gains.

When I buy a share in a company, I’m not buying a lottery ticket. I’m buying part-ownership of a business. And I’m also buying a share of the firm’s future earnings and cash dividends. And when that business does well, its share price usually follows. In other words, all else being equal, when a share price falls, it usually offers better value to current buyers. As prices fall, today’s beaten-down shares become higher-return investments looking ahead. That’s because I’m buying a company’s future and not its past. Hence, for me, stock market crashes become buying sprees to generate future wealth.

Another way I think of this is that falling prices mean that I buy more of a company’s future earnings for less. And generally speaking, when company earnings rise over time, cash dividends and share prices usually follow suit. However, it takes a lot of optimism to buy big when market sentiment is so negative, as is happening now.

What should I do with my spare cash?

For the record, my family portfolio’s losses since 31 December are the largest I’ve experienced in 35 years as an investor. But that’s wholly because we’ve never had so much capital invested in shares. Then again, during 2021-22, we’ve also built up the largest cash pile we’ve ever had. And stock market crash or no stock market crash, I can’t see a better place for this spare cash than to be invested in quality companies.

In summary, despite crashing US stock prices, I’m still keen on buying cheap UK shares trading on low earnings multiples that offer high earnings yields and bumper dividend yields. As a long-term value investor, this is the best way I know to survive a stock market crash!

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