I’ve recently been studying major stock market crashes throughout history. (Exciting, I know!) And one thing I was reminded of was just how much money can be made buying quality shares when widespread panic sets in.
To fully capitalise upon opportunities thrown up during a market crash, I’d need cash, of course. Preferably a fair bit of it. But my Stocks and Shares ISA cash balance led me to believe I’m somewhat underweight in this regard.
That is to say, I have some, but not enough.
Harvesting gains
Around this time each year, I take a good few hours to study my portfolio and make sure I’m happy with it. I revisit my investment thesis for each stock I own, making notes on whether I’m satisfied with its progress, sizing, valuation, and so on.
One conclusion I recently came to was that my long-term holding in taser-maker Axon Enterprise had become too large. This is a stock that has turned a $1,000 investment made 20 years ago into over $310,000 today!
Unfortunately, I haven’t held my shares that long. But they have risen now for eight straight years, so I’m up significantly. And it also means that this single holding recently ballooned to around 20% of my full portfolio value.
Now, like Warren Buffett, I’m a firm believer in letting my winners run. But I felt a bit of rebalancing was in order, especially as the stock had become very richly valued. So I trimmed my holding.
The result is that I now have much more money in my ISA than before, just sat there waiting for opportunities.
History lessons
The idea that a bell rings to signal when to get into or out of the stock market is simply not credible. After nearly fifty years in this business, I don’t know anybody who has done it successfully and consistently. I don’t even know anybody who knows anybody who has.
Jack Bogle
It’s rare a week goes by without some investor or economist predicting an imminent stock market crash. The causes of their envisioned market meltdowns range from rising interest rates to rising sea levels.
Yet they’re rarely accurate, and that’s why I generally don’t listen to the doom-mongers. However, I also know that stock market crashes are inevitable. So I always need to bear that in mind.
In the television documentary Becoming Warren Buffett, we see footage of the hallway leading to the Oracle of Omaha’s office. Hung up are framed front pages of newspapers reporting infamous stock market crashes throughout Wall Street history.
As Buffett explained: “I wanted to put on the walls days of extreme panic in Wall Street, just as a reminder that anything can happen in this world. I mean, it’s instructive art, you can call it“.
I find it instructive to remind myself that the US and UK stock markets have recovered from every crash that’s happened so far. So I know that history is on my side when I’m buying stocks during severe downturns.
Ultimately, I see big market drops as opportunities to exploit, rather than events to fear. And now I have my own war chest in my ISA waiting to be deployed when the time comes.
