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The words ‘stock market crash’ strike fear into many investors. Such accidents are not very common. When the market goes down from time to time, the crash is more than just a downward movement. One common definition of a crash is a loss of value of 20% or more in a short period of time.
I don’t know when the next crash will happen. In fact, no one else. But it is bound to happen sooner or later.
Instead of striking fear in my heart, which can be good news for me – depending on how I choose to act.
Why accidents can be great opportunities
What happens in a stock market crash?
The price buyers are willing to pay and sellers to receive the stock usually falls – sometimes dramatically.
But what about the intrinsic value of these stocks? Is the price lower than just the day before?
Sometimes it works. For example, if a bank run causes a stock market crash, bank stocks may fall. That may reflect investors’ perception (or fear) that after running on competitors, the bank will lose some customers and future profits may be affected. In other words, a lower stock price can only reflect the fact that in the event, the reduced value of the business appears to be real.
However, this is not always the case in stock market crashes. To find out the exact share price for the past year, go to the historical chart Howden JoineryFor example.
Remember the sharp fall of early 2020 when we saw the pandemic-related crash.
Has the pandemic affected the short-term outlook for Howden? Absolutely. Profits ended up falling by 30% in 2020 compared to the previous year. But does the pandemic change Howden’s long-term prospects dramatically to see the kind of fall seen in the chart above?
Judge the possibilities
Now we know the answer is no. If I had bought Howden shares in the March 2020 stock market crash, I could have more than doubled my money in just a year and a half.
But in the accident must make a decision to move forward. In 2020, I have no use for Howden now.
In practice that means as an investor I try to assess the possibilities. By staying in the business, I know when considering what stocks to add to my portfolio, I feel like I can better judge whether they can be affected by certain events. That helps me appreciate it, so that if a stock market crash causes the price to drop below that value, I feel confident that I’m looking for a bargain and not a trap.
Get ready today
That is why I try to invest only in areas where I know that I can evaluate the value and prospects of the company.
My investment philosophy is all about trying to buy great companies at attractive prices. Crashes that lower share prices even for companies with unchanged prospects can help me do this, hopefully speeding up my efforts to build wealth.
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