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Amid the headlines of crashing share prices and unexpected turnarounds in recent weeks, some investors are nursing big losses – but others have made a lot of money in short order. While the US S&P 500 index met the formal definition of a stock market crash last month (a 20% fall in a short period of time), things were not as bad on this side of the pond, although many individual shares did crash.
Although a stock market crash can be frightening – especially if you have not personally experienced one before – they can also offer outstanding opportunities for a long-term investor to try and build wealth.
But the window of opportunity can be very limited.
That is why I am getting ready for the next stock market crash right now, even though I have no idea how far away it may be. It could be here in days, or it might take decades.
Getting to grips with what drives share valuations
An important thing for an investor to understand at any point is how shares are valued in practice (sometimes very inaccurately) and how they ought to be valued in theory.
Different investors have their own thoughts on the latter point, but whatever valuation approach you personally favour, to judge whether a share is potentially a bargain, you need some way of valuing it.
Why does this matter in a stock market crash specifically, as well as more generally?
Something that commonly happens in a crash is that many share prices fall seemingly indiscriminately. For some, that valuation drop makes no rational sense.
For others, though, whatever has caused the crash has also negatively affected their valuation (think of banks during the last financial crisis, for example). If you do not have a grasp of what drives valuations, you cannot reliably judge whether a share’s fall in a crash is justified or not.
When shops have incredible sales, eager shoppers queue up knowing exactly what they want to get their hands on when the door opens – because they know it might not be there for long.
I treat a stock market crash the same way, so I’m taking time now to get ready for it by having a list of shares I want to buy as soon as I can buy them at an attractive price.
For example, consider Apple (NASDAQ: AAPL). I owned the tech share in the past but ended up selling it (at a handsome profit) when it reached a point I felt was overvalued.
What I liked about Apple’s business originally still applies. From its iconic brand and large installed user base, to proprietary technology and a services business with massive potential, I see it as a money-making machine. Net income last year was $94bn.
Massive though it is, it declined for the second year on the trot. Apple faces multiple risks: a weak economy hurting consumer demand, cheaper Asian rivals taking market share, and US tariff policy adding costs are just three that spring to mind.
At the right price to reflect those risks as well as the opportunities, though, I would snap up the share. It is on my shopping list for the next stock market crash if it hits the right price!
This story originally appeared on Motley Fool
