As an investor, some of the most alarming combination of words are “stock market crash”.
I do not try to time the market. Like everyone else, I do not know when the next stock market crash will come. I simply know that, at some point, the market will crash again as it has done many times in history.
With a weak economic backdrop globally, I would not be surprised to see a crash over the next several years. Whether or not that happens, I am getting ready now.
Quality on sale
What do I mean by getting ready? Specifically, I am making a list of companies I would like to own in my portfolio – if they were available at the right price.
When the market crashes, a lot of people focus on the paper loss they have made as well-known shares suddenly tumble in value.
That is understandable but I do not think it is useful. After all, a paper loss is just that. If the value of my shares falls below what I paid for them, I do not lose anything unless I choose to sell them.
By contrast, I could use a stock market crash as an opportunity to scoop up shares in what I see as great companies at bargain prices. In fact, that is my plan!
Finding brilliant shares to buy
But how could I find such shares? Waiting until a crash does not seem like the right approach to me. Sometimes, share prices plummet, but only briefly. So I feel I need to be ready in advance so I can seize the moment when it comes. It may be short-lived.
It means that, right now, I am looking for businesses I think would make a good long-term investment.
I want to buy into businesses I think have a competitive advantage in a market likely to experience substantial demand for a long time to come. I also consider factors like their financial health. Too much debt on the balance sheet can be a red flag for me, for example.
Getting ready to seize the moment
There are quite a few such companies on my radar, from Judges Scientific to Spirax-Sarco.
Their share prices are too high for me to add them to my portfolio today. But if a stock market crash sent their shares plummeting, I want to be ready to pounce while I can.
To do that, I need to be ready ahead of time. That means making a wishlist of companies I would like to own – at the right price – today.
If there is a stock market crash, before buying, I would also want to judge whether those shares were still as attractive as they seem now. Has a crash led to indiscriminate falls in share prices, or is the market turbulence caused by an underlying reason that could affect the business outlook for the firms I am eyeing?
Being able to seize what could be a short-lived but massively rewarding opportunity requires preparation.
That is why, rather than trying to guess when the next stock market crash might happen, I am identifying shares to buy when it does!