- We can describe of an average investor’s behavior in a stock market crash in 2 words. Panic & sell the whole stock portfolio. After selling portfolios most people keep their cash in savings accounts or buy some gold.
- If you want to succeed in a market crash do the exact opposite of average investor is doing.
- Today’s market has been so highly-priced & a lot of investors out there are scared of a market crash or a recession. A lot of people are worried about the precious stock portfolio crashing & being left with half of what they originally had. But recession may be a positive thing for those smart investors.
What is a recession?
- A recession is a period of economic decline that lasts for at least a few months. There is no point in worrying when a recession occurs. We have to rethink our investment approach again. We have these questions again from ourselves.
- Did we invest in these stocks because they were quality companies trading at a fair price?
- Did we understand the company that we invest in well?
- If you didn’t then go review that company again & do you still think it is a good company? If so, it is now trading at a cheaper price, perhaps the question might be asked why not buy more stocks?
How to behave
- Those who invested in quality companies that they understood the value of then you have nothing to worry about. But once you review your stock & now you identified that the stock you purchased is not the right decision then you have to create an exit plan for the stock.
- You could wait until the end of the recession & once the stock price hits your purchased price you can sell the stock. But if you identify that the stock will not recover again, the business operation of the company will not be normal again then you have to sell off your stock portion & minimize your loss. Taking 50% of the loss is more effective than taking 100% of the loss.
- Even if you are a great equity analyst/business analyst there is always a chance not to work your investment as you wish. As John Templeton says,
“Even the best analysts will be wrong, at least one out of three times.”
John Templeton
- If you think the market crash is coming you can keep some cash in your savings account. After a market crash, you can great companies for a fair price.
“The best time to buy is when there is blood in the streets.”
Nathan Rothschild
- Many great investors keep a lot of cash piled in their hands to buy stocks when they are very cheap, when everyone is fearful & everyone wants to exit from the market, and when everyone is buying gold great investors like Warren Buffett, Ray Dalio, Mohnish Pabari buy stocks at very cheap prices using their cash pile.
