There’s one big question everyone thinking of investing in the stock market needs to ask. What if it crashes?
It’s the thing everyone worries about before getting started. But the prospect is less threatening than it might seem.
One way to lose
The market value of houses going down doesn’t matter if you only want to live in one. It’s only a problem in two situations.
One is when people want – or need – to sell. And the other is when there’s debt involved that they need to refinance.
Outside these situations, though, lower prices aren’t an issue. And there’s no reason why either should be the case with stocks.
Investors should always make sure they have enough excess cash before buying stocks. That means they won’t have to sell in a crash. They should also absolutely avoid using debt to buy investments. That immediately takes the risk of having to refinance to zero.
The only way to lose money in a stock market crash is by selling, either to raise cash or due to debt. But these are risks investors don’t have to take.
Warren Buffett
Warren Buffett might be the greatest investor of all time. But this isn’t the result of anticipating downturns and getting out of the way.
The Covid-19 pandemic is a great example. When shares crashed, Berkshire Hathaway didn’t look to liquidate its stock portfolio.
With a few exceptions, Buffett’s firm didn’t sell low. The company’s financial position was strong enough that it didn’t have to.
Source: Fiscal.ai
As a result, Berkshire’s book value didn’t go down during the pandemic. And it’s now at the highest level it’s ever been.
Stock market crashes are inevitable and unpredictable. But making it to the other side is more important than seeing them coming.
Investing like Buffett isn’t easy. But investors can copy the approach of managing their finances to remove the risk of a crash.
Value investing
Buffett’s success wasn’t built on anticipating stock market movements. It’s the result of finding opportunities to buy stocks when they’re undervalued.
That’s what I’m looking to do in my own portfolio. And one name I’m looking at right now is US insurance broker Brown & Brown (NYSE:BRO).
The stock price is at a 52-week low. And a big reason for this is that artificial intelligence (AI) products targeting insurance are starting to appear.
At the moment, those products mostly target generic lines, which isn’t what Brown & Brown specialises in. But that isn’t all. The firm’s size allows it to attract better rates from carriers and offer these to customers. And that’s something AI can’t replicate.
Foolish approach
Investing well isn’t about knowing when the next stock market crash is coming. But it is about being able to make it through. Investors who buy shares at low prices stand to do well over time – even if the shares go lower in the short term. And that’s my plan.
Brown & Brown has a business that I think is harder to disrupt than the market realises. That’s why I’m buying it at today’s prices.
