There are a couple of things we can do after a stock market crash. We can panic & sell our whole stock holdings for very cheap prices, we can buy gold & stay away from the stock market for the rest of our lives. These are the things that most ordinary people do when it comes to a market crash.
But when we study world great investors like Warren Buffett, Charlie Munger, Ray Dalio, Mohnish Pabrai, Peter Lynch, and Bill Ackman, they operate oppositely from ordinary people. They invest a lot of money into the stock market & buy companies for very cheap prices.
Why do they heavily invest when a market crash occurs? The answer is simple. They buy the companies, not the ticket symbols. As Peter Lynch says, “Stocks are not lottery tickets, there is a company behind every stock.” Retail investors are feared because they don’t understand the companies they bought.
When we build our portfolio we have to build a very strong one because we don’t know what is going to happen to the stock market over the short term. The stock market can down more than 50% within a few months. It could bounce back to pre-crash level, but what we don’t know is how much time it takes.
How To Build A Resilient Portfolio?
The first thing you need to identify is the purpose of investing in the stock market. The purpose of investing in the stock market can be different from person to person. If you are a college student who is getting into the job market in the next few years you have plenty of time to make enough mistakes. But if you are a family man in your 30s you can’t risk your savings in the stock market. You have to look after your family even during a market crash.
If you are a person who gets retired recently you can’t even lose a single dollar. So, be careful with your intention of investing.
After identifying your purpose you can buy great companies for great prices. When a market crash occurs all stocks fall, both good & bad stocks. You have to be careful to identify the great companies. After a crash, some businesses never recover. To identify the great companies you have to deep down into each stock.
How To Identify A Great Company?
The nature of the product or service, market dominance, customer satisfaction with products & services
The growth of the revenue & profit for the last 10 years.
The assets, debt & equity positions.
The management team, top shareholders.
The basic financial ratios like PE ratio, Gross Profit Margin, Net Profit Margin, Dividend Yield, Debt to Asset Ratio, Dividend Payout Ratio, Earning Yield, etc.
