Investors typically fear a stock market crash, always wanting their shares to go up. That’s a natural emotion, but I say it’s dead wrong.
Warren Buffett’s annual letters to Berkshire Hathaway shareholders are legendary founts of wisdom. In 1997, he posed a quiz, first asking: “If you plan to eat hamburgers throughout your life and are not a cattle producer, should you wish for higher or lower prices for beef?” The answer to that is easy, yes?
He then went on to ask: “If you expect to be a net saver during the next five years, should you hope for a higher or lower stock market during that period?” If you’re planning to be buying shares over a long spell, you’ll get more for your money when prices are low. So that’s what you’d want, isn’t it?
That’s the wrong way ’round
In reality, most stock market investors are ecstatic when they see the market rise. They just love seeing the value of their holdings grow. That’s even though the things they want to buy more of are getting more expensive. And they can be inconsolable during a stock market crash, when they could actually buy more of what they want for less money. To me that’s a bit like saying: “I want a burger every day, so I do hope the price keeps going up!“
Now, I know there’s a difference between burgers and shares. When you eat a burger, it’s gone. Consumers don’t buy burgers with a view to selling them later for a profit. With shares, of course, that’s exactly what you do want. And you should want the price to be higher when you sell.Â
A stock market crash is your friend
So you will profit best by buying shares when they’re cheap. But eventually, you will need prices to rise to realise some gains. In reality, stock markets tend not to alternate between lengthy up spells and lengthy down spells. Instead, we see an overall inexorable rise over the decades. So what’s the point of even thinking about it? Well, that’s where market crashes, which tend to be short term, come in.
Take the current stock market crash driven by the Covid-19 pandemic. The stock market has had a dire year so far, but it’s not all gloom. Share prices have already started to recover, some very strongly. It’s happened a lot quicker than I expected, for sure. And I’m certainly convinced that when the crisis is over, stock markets will regain their previous highs and will carry on growing for decades to come.
Buy low, sell high
Had this stock market crash not happened, regular investors would have carried on buying more and more shares. And they’d probably do very well when it comes time to sell up and enjoy a comfortable retirement. But during the months of the crash, those same regular investors will be able to buy even more shares with their cash. And that should result in an even bigger pot at selling time.
A severe stock market crash only comes along once in a blue moon. I say take advantage of it now, and stock up on bargain shares while you can.