Will the stock market crash this year – or will it keep powering upwards?
I see good arguments on both sides of that debate and the reality is that nobody is able to time a crash in advance with certainty.
It is going to happen – we just do not know when.
But while many investors feel a shiver down their spine when they hear the word crash, it need not always be a bad thing.
Indeed, for a small private investor with some spare cash to put to use, it can actually present a brilliant opportunity to try and build wealth.
The small investor’s advantage
Something that can get overlooked is that professional investors do not have all the advantages.
When the stock market plummets, their hands may be tied. They can have cash obligations they need to meet, or clients pulling money out their funds can force them to sell shares at fire sale prices.
By contrast, a small private investor who is beholden to nobody can act as they choose during a crash.
They do not have fundholders, managing directors and finance departments breathing down their necks the way a pro might. So, they can act in what they think is the best way to seize the opportunity.
A crash can be a bargain-hunting opportunity
What exactly is that opportunity that I keep mentioning?
Put simply, it is a temporary imbalance between what a brilliant business is worth for the long term and what its current share price suggests it is worth.
In theory, the stock market ought to be able to price companies accurately based on currently available information.
In practice, there is debate about how efficient that market pricing mechanism is, even in normal conditions.
During a stock market crash, prices can move around wildly.
In some cases, that mirrors rapidly shifting prospects for a given business. But in other cases, prices move around far more than a business’s long-term prospects do.
Such volatility can therefore offer an opportunity to scoop up shares in brilliant businesses at bargain prices.
But such windows of opportunity can be short-lived. A savvy investor therefore spends time well before the storm deciding what might be on their shopping list when the stock market next has a fit.
Putting the theory into practice
As an example, think about no-frills airline easyJet (LSE: EZJ).
In under three months back in 2020, the easyJet share price fell by more than two-thirds.
Did that make sense?
Uncertainty about demand for air travel during the pandemic was playing havoc with different investors’ expectations for the business. easyJet has a lot of fixed costs, including maintaining a fleet of aircraft whether it flies or not.
But it also has a proven business model and strong brand.
The brave were rewarded. The shares surged 78% in weeks in summer 2020. They then fell again, before doubling between October 2020 and the following May.
Today easyJet faces the risks of weakening passenger demand and higher fuel prices caused by the Middle Eastern war. The share price is down 35% so far this year.
So, it is not on my shopping list right now, as fuel price volatility could linger. But who knows wh ther it might get back on my watchlist in the future.
Instead, today I am hunting for brilliant shares to keep on my watchlist before the next stock market crash.
C Ruane has no position in any of the shares mentioned. The Twelfth Magpie has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor and Hidden Winners.
This story originally appeared on Motley Fool
