They say that more millionaires are minted during share market crashes than at any other time. But why is that the case? Most of us think of share market crashes as times where our personal wealth takes a big (but hopefully temporary) dive, at least on paper. It's a much-dreaded event, to be sure, and one that every ASX investor thinks about quite a lot, I'd wager.
But the reason market crashes can be so lucrative is this very fear itself. See, as value investing legend Benjamin Graham once said, markets are sometimes driven by one of 2 emotions: fear and greed. It's these emotions that cause markets to become temporarily irrational. And in the case of fear, this is what you see during a market crash. Think back to the nasty crash we saw in March.
Did the intrinsic and rational value of S&P/ASX 200 Index (ASX: XJO) companies really fall 36.5% between 20 February and 23 March? I don't think so. And yet that's exactly what the ASX 200 did, which was of course followed by a rapid recovery.
Friends, this temporary divorce from rationality is something we can all exploit. It's why the most millionaires are minted in these times. That's why I think all investors should have a small percentage of their portfolios in cash, so you can take advantage of these situations.
But which shares to buy in a crash? Well, that's a good question.
What are the best ASX shares to buy in a market crash?
You could always simply stick with index funds, like those tracking the ASX 200 for instance. As an example, the iShares Core S&P/ASX 200 (ASX: IOZ) rose around 33% in value between 23 March and 10 June. Not a bad return for 2½ months.
But, after looking at the performance of various ASX shares in March and April, I have concluded that the best area to focus on are cyclical growth shares, in particular, those involved in the tech space.
ASX growth shares are funny things. They tend to outperform the broader share market during bull markets, but underperform during bear markets. That's because, due to their smaller natures, growth shares don't tend to be as financially resilient as larger companies in times of trouble. However, because tech companies tend to have fixed costs that are relatively low, tech shares tend to be able to weather these storms far better than others, say a small mining exploration company.
If we look at the companies that have performed the best since 23 March, the list is dominated by tech. We have Afterpay Ltd (ASX: APT), up more than 1,000% going off today's share prices. Xero Limited (ASX: XRO) is up nearly 100%, Zip Co Ltd (ASX: Z1P) is up 480%, while Sezzle Inc (ASX: SZL) is up a mind-blowing 2,000%.
In fact, the entire S&P/ASX All Technology Index (ASX: XTX) is up 130% since 23 March.
Foolish takeaway
Now I'm not advocating that anyone should start trying to 'time the market' here. However, next time a market crash comes around, I am suggesting that the first ASX shares on your watchlist should be growth shares. Especially those in the tech space. Obviously, if a particular company is being disproportionally affected by the cause of the market crash (eg Webjet Limited (ASX: WEB) in March), it might be better to sit on the sidelines.
I made the mistake of buying some value plays in March, instead of focusing on the companies with the biggest upside potential (first world problems). I won't be making the same mistake again, and I don't think you should either!
