As the FTSE 100 and other stock market indices are falling, concerns are rising that a stock market correction has begun. This week we’ve witnessed chaos in the US financial markets. It started as an amateur investor uprising against some hedge funds betting against a US stock called GameStop. Then it quickly spiralled into a battle between retail investors and hedge funds. What began as highly entertaining has turned pretty grim and now there are lawsuits pending and congress is heatedly discussing the rights and wrongs of the current stock market set-ups.
Is a stock market crash imminent?
The details are widely available online, but I’m wondering if what’s happened in the US is enough to start a major correction in stock prices. The repercussions are already sending shock waves through the global financial markets. Could it lead to a financial crash like last year’s market crash caused by the onset of the pandemic? It’s certainly plausible, but as this story is still unfolding, it’s hard to tell how it will end.
As a long-term value investor, I don’t worry too much about the day-to-day fluctuations of the markets. Rather than get panicked by the prospect of a stock market correction or crash, I see it as an opportunity to buy shares in good quality companies at knock-down prices. The strongest businesses should survive and see their share prices recover, that’s why I love buying in a dip.
FTSE 100 fluctuations
The vaccine crisis unfolding across Europe is also likely to be affecting the FTSE 100. The potential for a widespread vaccine rollout gives hope that the world can return to normal. Unfortunately, supply issues are causing headwinds.
Nevertheless, people adapt well to a crisis, this has been well documented in the past year. The increase in online grocery sales provides evidence, as does the vast increase in product sales. It shows that while consumers are spending less on services, they’re spending more on regular goods, like bikes and household appliances. So when the turnaround finally happens, I think we’ll see a rapid revival in demand for things that have fallen by the wayside, hopefully including FTSE 100 stocks.
I like to follow Warren Buffett’s lead
Billionaire investor Warren Buffett is an example of a successful value investor who has racked up a net worth of around $84.6bn. He’s shrewd but cautious, and one of his most repeated quotes is to buy when others are fearful. That’s because he does his research and knows which companies are potentially bargains in a market crisis. These tend to be companies that have a competitive edge on their peers. They usually offer a reliable dividend and are well established with strength in their leadership team.
This might seem like a lot of boxes to tick, but I think it’s pretty much common sense. When I consider the successful businesses of the world, many of them got where they are with a competitive edge and integrity.
I believe it’s possible to make money from the stock market, but it’s important to be careful and not get caught up in the fear of missing out. I make it my business to research and really understand what I’m investing in before buying shares. Otherwise, it’s not much different to gambling.