The stock market crash in the spring took many people unawares. The coronavirus pandemic seemed to arrive suddenly and the markets went from being uninterested to terrified in short order!
However, if there is to be a second crash in the stock market because of the pandemic, it probably won’t be as sudden. We know about the virus now. And in the UK, we are starting to get familiar with local restrictions and mini-lockdowns every time the virus bubbles up.
A second stock market crash could be different
Of course, the virus could gain traction and begin to affect the world economy again. We’ll probably see it coming, and my guess is the stock market will grind lower day after day. I reckon stock market crash number two will probably be like watching a train crash in slow motion.
But it could end up being a once-in-a-lifetime chance to buy cheap shares (yes, I know the March crash was a once-in-a-lifetime opportunity, but a second crash is one we’d be better prepared for). Pandemics don’t seem to come around very often. The last major one happened around a hundred years ago – the so-called Spanish flu.
So, will you be ready? It makes sense to buy shares when they are selling more cheaply. Just like it makes sense to buy merchandise from a shop when it’s marked down in the sales. Indeed, famous investors such as Warren Buffett have made billions by doing just that and then holding their shares for years.
If you choose carefully, the underlying progress of the business can drive the share price higher again over time. And the stock market may also re-assign a higher valuation to the company to reflect the improving prospects of the business. Those two drivers could combine to produce a satisfactory return on your investment via capital gains. And you’ll also likely gain from shareholder dividend payments.
Be very selective
But it’s no good picking any old share. In the recent crash, for example, Warren Buffett didn’t buy shares in the airlines, he sold the ones he already had. Why? because he knew that airlines made for a poor-quality, cyclical business. Indeed, he’d written about it several times in his annual letters to Berkshire Hathaway shareholders – the conglomerate he controls.
Incidentally, if you are new to the world of investing (or an old hand like me) those shareholder letters are an excellent resource to learn from. I’d start with the first and read through to the end of the last.
Buffett sold his airlines because he thought the industry may have changed forever because of Covid-19. Instead, he’s doing what he’s always done and focusing on the shares of companies with high-quality underlying businesses. Indeed, those are the shares that will provide good opportunities in a market downturn or second crash.
So, we can prepare now by sorting out the great companies from mediocre or poor companies. If we build a watch list of shares we’d one day like to own we’ll be ready to pounce and buy some if they become cheaper in a second stock market crash.