You too can learn to love a falling market

In the last five days, the ASX has been sliding downward. The S&P/ASX 200 index (Index: ^AXJO) (ASX: XJO), to use just one measure of the overall market, has fallen nearly 5%.

Shares of Woolworths (ASX: WOW), Wesfarmers (ASX: WES), and Telstra (ASX: TLS) are down by roughly the same amount.

It seems Mr. Market is feeling a wee bit nervous just now — and this should cheer up savvy, long-term investors. As Warren Buffett has said, the way to make money in the stock market is “to be fearful when others are greedy and greedy when others are fearful”.

How to be greedy when others are fearful

Simply put, the volatility and fear in the market, such as we’re seeing today, can create buying opportunities. On the other hand, when the market is roaring, it can be hard to find good value.

Here’s one example. Even a blue chip company with sustainable competitive advantages and reasonable growth prospects like Coca-Cola Amatil (ASX: CCL) likely isn’t a great investment if you overpay. CCL shares for 30 times earnings? Er, no thanks, at least with no change to the growth profile. CCL shares for 15 times earnings? Now we’re talking. (The shares currently trade for around 21 times earnings, and of course using price-to-earnings ratios is just one shorthand way to value a company.)

Likewise, Woolworths shares aren’t what you’d call a steal today, trading for around 18 times earnings. But should the market slide continue, the share price could come into reasonable territory and give investors the chance to own a piece of a fantastic company at a much better price.

What to do now

One of the best ways you can prepare yourself to take advantage of what could be a coming wave of good prices — in the possible, but by no means certain, event of the market falling further — is to create a watch list of potential investments. Identify the shares you’d like to buy (or a current position you’d like to add to), and in what price range, and then wait for the market to come to you.

This way, you may find yourself cheering on a market fall and the plethora of buying opportunities it can present.

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Motley Fool contributor Catherine Baab-Muguira has no financial interest in any of the companies mentioned in this article.

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