Here’s how I’m planning for a second stock market crash

How I plan to navigate a second stock market crash and outperform the market following Warren Buffett, Nick Train, Charlie Munger and Philip Fisher.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

The possibility of a second stock market crash in 2020 hasn’t gone away. And I can understand how the threat of another crash makes people nervous about investing in the stock market.

A second stock market crash could be an opportunity

But some of the best share bargains arrive in times of uncertainty. Indeed, famous US investor Warren Buffett has achieved extraordinary returns by buying the stocks of strong underlying businesses when they are out of favour with investors.

The second part of Buffett’s strategy involves holding onto his shares for a long time. And that means riding the ups and downs of the market, including any further stock market crash that may arrive in 2020. The idea is to hold until you realise the full potential of the underlying enterprise. Often, growth and operational progress will cause the share price to rise. It could also fuel a growing stream of shareholder dividends.

But Buffett isn’t the only investor to pursue such a strategy. Early on, growth investor Philip Fisher influenced Buffett to adopt a long-term perspective. And his ‘partner’ Charlie Munger also helped persuade him to hold quality shares for a long time. 

Indeed, Buffett’s earlier strategy involved focusing on cheap, undervalued businesses and buying their shares for a relatively quick bounce-back gain. Often, the quality of the underlying business was lacking. So those stocks weren’t suitable for a long-term hold.

Impressive returns

Most of Buffett’s billions have come from the long-term, quality business strategy that he follows now. And many have copied his approach. For example, I recently wrote about Nick Train of fund management company Lindsell Train. His technique chimes with Buffett’s because he holds the shares of quality businesses through “thick and thin.” And, over the past 20 years, Train’s performance has been impressive. He’s delivered his fund investors returns measured in hundreds of per cent.

One thing that both Buffett and Train didn’t do was to sell any of their quality shares when the stock market crash arrived in the spring. Although, in fairness, Buffett did sell his holdings in the airlines. But an airline isn’t a high-quality business. Buffett himself had been telling us that for years.

So central to my plan for handling a second stock market crash is to make sure strong, high-quality businesses back the shares I’m holding now. Indeed, if there’s anything in my portfolio that doesn’t attract my full conviction, now’s the time to chuck it out.

Step two of the plan is to focus on a long-term investment period. If I aim to hold my shares for 20 years, say, another crash in 2020 will become a short-term setback.

The final step is to prepare a watch list now of quality shares I’d like to own one day. Then, if a second crash does arrive, I can potentially buy some of those quality shares while the market is marking them down to a lower price.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Kevin Godbold has no position in any share 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.

More on Investing Articles

Illustration of flames over a black background
Investing Articles

2 red-hot UK growth stocks to consider buying in April

These two growth stocks are performing well, but can they continue to deliver for investors through 2024 and beyond?

Read more »

Charticle

Is JD Sports Fashion one of the FTSE 100’s best value stocks? Here’s what the charts say!

The JD Sports Fashion share price remains a wild ride during the first quarter. Could it be one of the…

Read more »

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »