Why investors should love market crashes


When shares are lower, you can buy more for your money, writes The Motley Fool.

When you buy shares, you trade your cash for a chunk of a business.

The lower the price of the shares you’re buying, the more of them you can pick up for your money.

Since the true value of those shares is based on the performance of the business behind them and not the random movements of the market, long-term investors should love market crashes.

After all, would you rather:

  • Invest $100 to get $50 worth of future business value, or
  •  Invest $50 to get $100 worth of future business value?

All else being equal, market crashes are what provide you the opportunity to get more business value for the money you’re investing.

What about the shares I already own?

Of course, in an indiscriminate market crash, the shares you already own will fall along with the ones you’re looking to buy.

Unless you’ve got an urgent need to sell those, though, does it really matter? The crash has no impact on the real value of the business underlying those stocks.

Indeed, the crash just might be providing you the opportunity to buy more shares of a company you already thought highly enough of to own.

That said, it’s far easier said than done to watch your apparent net worth crumble in a market crash while stoically searching out ways to hand over even more cash to buy those falling shares.

In fact, it’s darn near impossible to do, unless you’ve got both a stable financial foundation and the mind-set of a value investor in the best traditions of Benjamin Graham and Warren Buffett.

Mind over matter

Having a stable financial foundation matters, because the one thing that can ruin your best investing plans is being required to sell your shares while they’re busy crashing for no good reason.

With enough cash in the bank to handle life’s little surprises, and enough insurance to cover the bigger ones, you can dramatically reduce the potential need to sell your shares to cover an unexpected event.

With that foundation firmly in place, you can then turn your attention toward what you’re able to buy for the money you’re putting to work — the essence of value investing.

Take a look at the companies in this table, for instance:

Company Dividend Yield P/E Fall from 52-Week High
JB Hi-Fi Limited (ASX: JBH) 5.4% 14.2 34%
Ardent Leisure (ASX: AAD) 10.3% 9.1 34%
AMP Limited (ASX: AMP) 8.0% 12.1 36%
Wotif.com (ASX: WTF) 5.8% 15.7 36%
Macquarie Group (ASX: MQG) 9.0% 7.5 46%

They’ve all lost at least a third of their market cap vs. their 52-week highs, yet they have excellent dividend yields and anything from downright cheap (Macquarie) to reasonable (Wotif and JB Hi-Fi) valuations.

While that doesn’t make them automatic buys, they do have decent prospects, and a lowered market price should attract value investors’ attention.

Nevertheless, for shares to fall that far, that fast often indicates that there are very real risks that had not been previously fully priced into their shares.

So what’s wrong with them?

JB Hi-Fi is contending with slowing sales growth, the online threat and low consumer confidence levels. Arguably, when the shares were trading over $20, too much optimism was priced into them.

Ardent Leisure operates bowling centres, a couple of Gold Coast theme parks and health clubs. You probably get the idea as to why the shares have been marked down. Online hotel booking site Wotif is in the same boat. AMP and Macquarie have fallen along with the general sharemarket.

The future counts

The market currently views these companies as somewhat damaged goods.

Still, the question of whether they’re worth owning now depends on their prospects for the future, rather than where their share price is trading today.

After all, the market has a short memory, and improved performance in the future will quickly erase today’s punishment for perceived — or potentially even real — wrongdoings.

If you think their futures are bright in spite of their current troubles, today’s lowered prices certainly give you more for your money than you would have gotten at earlier, higher prices.

If you’re at all inclined toward value investing, that should bring a smile to your face.

In the meantime, consider this one large company we think has some serious long-term potential. Get this free special report from the Motley Fool – The Best Stock For $100 Oil. Click here to sign up now.

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