Nobody knows what will happen next in the stock market. But what is certain is that, sooner or later, there will be a stock market correction. The only thing we do not know is when.
Could that come this autumn?
Some past corrections – and stock market crashes like Black Monday in 1987 – have happened in the season of mists and mellow fruitfulness.
As investors come back from their summer holidays and get fully into work mode once more, the period between September and December can often be a busy one. That can push the underlying strength or weakness of the economy to the fore.
With an increasingly fragile looking global economy, I would not be surprised to see a stock market correction over the next few months. But rather than spend hours on the futile task of trying to time the market, I am preparing for such a correction today – whenever it comes.
Good companies in hard times
The principle I apply when looking for bargains in a stock market correction is the same as at any other time. Like Warren Buffett, I am looking for what I think are great companies selling at attractive prices.
Doing that in a wobbly stock market can be easier than at other times – for several reasons.
First, a weak economy can separate the truly great, resilient companies from merely good ones whose fortunes slump when the wider economic environment is poor.
As well as that, a stock market correction can lead to even great companies having their share prices marked down.
Preparing a shopping list
That can present investors with an opportunity.
But although even a brilliant business can see its share price slump amid wider market moves, such bargain pricing might not last for long. Other investors have the same plan as I do, of swooping in to sweep up blue-chip bargains. So the fall in price of some shares can be short-lived.
That is why I am spending time now compiling and updating a shopping list of companies I would like to own in my share portfolio, if they become available at an attractive price.
Getting ready to bargain hunt
An example is Diageo.
The Guinness brewer owns a host of premium brands that give it pricing power. That means it is hugely profitable and has raised its dividend annually for over three decades. If consumers tighten their belts, though, that could be a risk to revenues.
But as a long-term investor, I think Diageo’s prospects in decades to come look excellent. With a price-to-earnings ratio of 19, however, the shares are not cheap.
If a stock market correction offers me a chance to buy into such quality firms at a good price, I will pounce on it. But to be prepared, for whenever such a correction may come, I am hunting today for the right shares to buy.
