It’s been good times on the share market since March.
When you’re enjoying a bull market, it’s human nature to not give much thought to what might happen when everything comes crashing down.
But more than one equities expert has said it’s important to act quickly and buy up bargains if the market ever slumps.
“Extreme conditions create the most attractive investing opportunities, with some 90% of market returns being earned over just 5% of trading days,” Collins St Value Fund managing director Michael Goldberg posted this month on Livewire.
“It’s precisely during those times that all those around you think you are crazy, when even your ‘gut’ insists that you’re making a mistake, that true long term profits are established.”
Goldberg said one needs to feel uncomfortable to realise comfortable long-term gains.
“It’s in recognising that discomfort and realising that therein lies the opportunities that the greatest investors make the most spectacular returns.”
But how can you act quickly when the market heads south? What do you do?
Prepare now for a market plunge later
Acting quickly requires much preparation beforehand.
One of the best things a stock investor can do in good times is to prepare a shopping list for bad times.
Forager research analyst Chloe Stokes explained in the latest edition of Ask A Fund Manager this week.
“My biggest regret came during the meltdown in March. We saw brilliant companies like Nike Inc and Lululemon Athletica Inc down more than 30% in a couple of days,” she told The Motley Fool.
“Those stocks would have been excellent investments at market prices, but because I never thought they were cheap enough to invest any time into, I didn’t have a thesis ready.”
Stokes is now a firm believer in having a target list ready – full of shares you wouldn’t buy now but would pounce on if they ever sunk.
“It might seem like a waste of time, but you never know when the opportunity could come along to own a high-quality business at a more than reasonable price,” she said.
“I wouldn’t want to miss out on owning some of my favourite businesses if the opportunity presents itself again.”
So create a watch list in a spreadsheet or your stockbroking platform. Write it on a piece of paper, if you have to.
Brainstorm shares that you wished you owned but never bought because they’ve been too expensive.
Then for each of them, pick a price at which you’d pounce.
Buying during a crash not for the faint-hearted
Mind you, even with a shopping list, it takes courage to buy shares when the market is collapsing.
Panic and anxiety set in, and even the professionals need plenty of gumption to pull it off.
Pengana Australian Equities senior fund manager Rhett Kessler called it “reaching across the abyss” — as in jumping over a deep canyon to try to make it to the other side.
It’s also named “vomit buying”, which might be more literally accurate.
“You literally buy something, then you stand up. You walk around the desk, trying your hardest to settle your stomach so that you don’t throw up,” said Kessler in October.
“Then you sit back down, and you buy some more at 5% lower.”
Even with decades of stock market experience, Kessler found last March very stressful.
“I can honestly say it was one of the toughest periods in my 30 years of experience in this industry.”
But Stokes reminds us the target list is worth doing.
“You go through something like March, and it’s always so upsetting not being able to buy them because you just hadn’t done work.”
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Motley Fool contributor Tony Yoo has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.
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