Since the 2020 stock market crash hit us, there’s been a lot of buying and selling. Far more than usual. But have investors been making more mistakes than usual too? Here are three things I think every investor should keep at the front of their minds.
Don’t buy the wrong stocks
You need me to give you such obvious advice as “don’t buy the wrong stocks”? Well, I keep having to remind myself of exactly that when I find myself ferreting around looking for fallen stocks to buy cheap. Maybe it’s not so dumb, so let me explain.
When there’s a stock market crash, many investors (me included) can’t resist digging among the biggest fallers and looking for potential recoveries. Even if they don’t fit in with our long-term strategy, and they’re stocks we’d never normally consider buying.
I’ve already described my own failure on that score when I bought Premier Oil shares during the last oil price crunch. It’s way out of my strategy these days, and that alone made it a mistake. It doesn’t matter how cheap it was. It was wrong for me. So, I say say don’t buy stocks that are ‘wrong’ for your strategy.
Do buy the right stocks
If my first piece of advice sounded stupid, you might think this sounds stupider. What I mean is, don’t buy cheap stocks during a stock market crash. Instead, buy good stocks cheap. And yes, there’s a difference.
It’s too easy to start by searching for cheap shares and then pick through them for ones that look good. But instead, I suggest you start off looking for good shares first, and then narrow them down to those you think are the best bargains. So focus on quality first, value second (and note I say value, not price).
An example, for me, might be easyJet, which is possibly the best airline investment there is. And its share price is down heavily. But I think airlines, even the best, are still lousy investments. So a ‘cheap first’ approach would have me considering easyJet, but ‘good first’ wouldn’t.
Ignore the stock market crash
How am I trying to put this together during the stock market crash? I start by reminding myself of my investing strategy. That’s focusing on dividend-paying stocks with little debt and a defensive nature.
I already have a fairly long list of ones that fit the bill, so I’m covering those mostly. I’ll then examine the prospects for each with a view to holding for at least five years, ideally 10 or more. I’m not looking for get-rich-quick crash bargains, and they’ll be weeded out anyway by my search for quality first, rather than just going on price falls.
Those that look especially good value will go on my shortlist, becoming candidates for my next chunk of investing cash.
You know what? I’ve just summarised the exact same approach I take when we’re not in a stock market crash. But then, why change your tried-and-tested strategy just because there’s a crash on?
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Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.