News that ‘The Big Short’ investor Michael Burry just placed a $1.6bn bet against the S&P 500 and Nasdaq has got everyone talking about the potential stock market crash. It could happen next week, so what should we do?
Burry isn’t the only one warning of a meltdown. Jeremy Grantham, who predicted both the 2000 dotcom crash and the financial crisis, issued an alert last month. ‘Rich Dad Poor Dad’ author Robert Kiyosaki is also spreading doom.
There’s a lot of bad news out there right now. Inflation and interest rates haven’t peaked. Two Chinese property developers – The Evergrande Group and Country Garden – are on the brink. The artificial intelligence-fuelled US stock market recovery may have gone as far as it can. The S&P 500 is already sliding.
Things are looking a bit shaky
In the UK, core inflation stuck at 6.9% in July. The Bank of England may have to engineer a recession to bring consumer price growth back under control.
If the stock market does crash, I know what I’ll do. Exactly the same as I did when the FTSE 100 dipped below 7,000 last October. I’ll pull out my list of favourite shares and buy more of them.
Regular Fool.co.uk users will know our philosophy. We think a crash is a terrible time to sell shares and the perfect moment to buy them. In a market meltdown, good companies are sold off with the bad through no fault of their own. For a while they’re on sale at bargain valuations.
By purchasing them in a crash, I should benefit when markets calm down and share prices recover their lost value. As they always do in the end. Buying cheap shares also helps me generate more dividend income too.
As with any strategy, there are risks. Timing the market’s impossible. It’s unlikely that I’ll manage to buy right at the bottom of the market. I could splurge on a few stocks, only for them to crash further. So I won’t deploy all my powder at once. If there’s a second or third dip I’ll buy more shares at an even cheaper price.
A short-lived chance make a long-term gain
Another risk is that the recovery takes longer than I would like. That’s less of a concern. I buy shares with a minimum 10-year view, giving them plenty of time to recoup their lost value and for my dividends to roll in.
The third danger is that I buy the wrong shares. I’ll get round this by focusing on solid companies with reliable revenues and sturdy valuations that have been caught up in the wider maelstrom.
Spirits giant Diageo is one target. Consumer goods giant Unilever another. Both typically trade at around 25 times earnings. Last week’s FTSE 100 slide has reduced that to 19.93 and 18.32 times earnings. That’s cheap by their standards and they could get cheaper still if the stock market does crash.
I’ve no idea whether it will. Neither do Burry, Grantham, Kiyosaki and the rest. While they have correctly called a market meltdown in the past, they’ve also made multiple doomsday warnings that never came true.
Either way, FTSE 100 shares look cheap and I’m ready to buy more.
