These days investors are getting increasingly savvy and educated. The market is as informed as ever. This goes for understanding each stock, its operations, and the consequences of events that may affect the business in question. However, it also goes for the theory of investing. For example, many investors know by now it’s not ideal to sell stocks in a market crash.
If you see a market crash materializing and get excited to buy stocks on the cheap rather than having the impulse to sell your stocks to avoid loss, you’re on the right path.
Market crashes are always short term, and the best companies will always come roaring back. This means as the price is falling, it’s the best chance to buy the stocks.
This all sounds obvious. But when you’re in a market crash and the value of your stocks are losing 5% and 10% day after day, it can be tempting to sell out to avoid more of a loss.
Investors can avoid this by focusing on the long run. Whatever it is that’s causing the market to crash won’t last forever. And the best stocks which are fairly valued will always come back better and stronger. So it’s crucial you not only hold your stocks, but you look for other high-quality businesses to add to your portfolio.
However, you may soon find that there’s another problem you’ll face in a market crash, deciding what price to buy stocks at.
How to buy stocks in a market crash
First off, no matter when you’re looking to buy or sell a stock, you should always take a long-term approach. This helps put into perspective what’s happening today and how much relevance it has to the long-term success of the business.
Anytime the price of stocks is falling rapidly, such as during a market crash, investors are bound to be flooded with emotions. Even if you know not to sell your stocks and instead take advantage of the situation, it will be incredibly difficult in the moment.
Stocks you have your eye on will continue to get cheaper by the day. So although they will look mighty attractive, many investors will be tempted to see how cheap they can buy the stock for.
These decisions are difficult because, of course, you want to buy the stock as cheaply as possible. However, you don’t want to miss out on the opportunity either.
To avoid this, investors should consider what the fair value price is of all the stocks on their watch list ahead of time. This way, if a market crash materializes, you can take advantage of the low price.
We all want to buy stocks as cheaply as possible, but it’s more important just to gain exposure. You may miss out on a few percentage points when you’re buying, but if you’re holding for years and believe the stock should grow several times over, then the buy price shouldn’t matter all that much anyway.
Top Canadian stocks to watch
It’s impossible to predict how big a market crash may become. You don’t know if it will be a small 10% correction or a 25% bear market.
That’s why knowing which stocks you want to buy ahead of time is crucial. Remember, we are buying the best businesses at the most attractive prices. So we can identify ahead of the market crash which stocks we want to buy because we know the businesses and their operations.
Now, of course, I would like to buy Shopify for as cheap as possible. However, looking back at this six-month chart, it’s clear that Shopify hasn’t traded for anywhere below $1,000.
So I know that if Shopify stock falls below a certain level, in this case roughly $1,000, it’s going to start to look very attractive. Of course, you’ll still have to do your homework and ensure no other headwinds are impacting the stock.
But once you realize there is value, especially for long-term investors, I would be ready to take the deal. Market crashes don’t happen very often, so it’s crucial we take full advantage when we have the opportunity.
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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.
Fool contributor Daniel Da Costa has no position in any of the stocks mentioned. Tom Gardner owns shares of Shopify. The Motley Fool owns shares of and recommends Shopify and Shopify.