When share prices are low, it’s a great time to be looking for stocks to buy. But nobody knows when the next stock market crash is coming, so what should investors do in the meantime?
One strategy is to hold off buying and wait for opportunities. That might be what billionaire investor Warren Buffett has been doing recently, but it’s not the only strategy for most investors.
Warren Buffett
A lot of people have pointed out that Buffett’s investment vehicle Berkshire Hathaway has been building cash reserves recently. While it has made some investments, it’s sold more than it’s bought.
I think it’s always worth paying attention to what some of the most thoughtful investors are doing. But Berkshire does have some unique reasons for piling up cash at the moment.
Sooner or later, the firm’s going to have to deal with Buffett’s shares being liquidated by the charities it’s being left to. And the company doesn’t want this falling into activist hands.
New CEO Greg Abel indicated that the way to avoid this might be by buying them back in a private transaction. Berkshire’s done this before, but it would cost around $165bn.
Stock market crashes
A stock market crash can be a tough experience. It’s not much fun seeing something you’ve bought selling 20% more cheaply a week later, especially if it’s part of your retirement plans.
When it comes to investment returns though, stock market crashes matter less than you might think. The most important thing is what the underlying business does.
Every company – even the best ones – go through difficult periods. But the best ones find ways to recover and this is what makes them great investments over the long term.
That means investors don’t need to wait for a stock market crash before thinking about buying shares. What they need to do is find high-quality businesses with strong long-term prospects.
A FTSE 100 survivor
Contract catering company Compass Group‘s (LSE:CPG) a great example. Lockdowns and travel restrictions meant the FTSE 100 company was hit hard by the pandemic.
The share price crashed 36% as sales fell and the firm barely broke even. But it came storming back, with revenues and earnings per share now at record levels – and the stock’s responded.
A key reason for this is the company’s scale, which gives it lower costs than competitors. And that allows it to offer better value to customers while maintaining strong margins.
That’s a long-term advantage not going away any time soon. So I think it’s a stock that investors could happily consider buying at today’s prices, even if a big downturn is around the corner.
Opportunities
The way to get ready for a stock market crash is to own shares in businesses that are likely to emerge stronger on the other side. That gives investors the best long-term chances.
If artificial intelligence (AI) leads to the kind of job losses investors are worried about, then Compass Group will find its business takes a hit. But this has happened before.
In that situation, I expect weaker demand will hit competitors with higher costs harder. So I think Compass might emerge stronger, which will ultimately lead to better investment returns.
