The stock market has crashed! Why I’d buy shares now

Despite the doom and gloom, I think this stock market crash is a great time to invest, writes Thomas Carr.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

The stock market has crashed. The FTSE 100 is down around 30% in the last three weeks. These are uncertain and disturbing times. The effect of the global response to the Covid-19 outbreak is without precedent, at least since the Second World War.

But amidst the panic and hysteria, I believe that the stock market has now presented the kind of buying opportunities that come about once in a generation.

Sure, company earnings will fall massively, for this year at least. It’s hard to imagine that many companies are going to be able to break even, let alone register profit growth. Some industries and companies with weak balance sheets will suffer tremendously, the most vulnerable will even go out of business. The global economy will probably go into recession. But it’s important to keep perspective.

The world will go on

The virus does not represent a threat to the future of humanity, despite the tragedy of the deaths so far and those to come. Likewise, the future of capitalism is also not in danger. Businesses and the stock market will continue to be at the centre of the human world.

The way that we value investments is also not going to change. The value of a company can be derived from its future cash flows and from its book value (or net asset value). While interest rates are low, companies that generate positive earnings returns will continue to be sought after.

Before the stock market crash, the average UK stock traded at around 17 times last year’s earnings. By definition, this means that one year’s earnings make up just one seventeenth of a company’s valuation, or around 6%. If the effect of the virus is to eliminate this year’s profits, then share prices should only have fallen by this amount. Even if we assume that companies will suffer big losses for this year, it still doesn’t correlate to the stock market falls that we have seen.

It’s my belief that this is not the time to sell your stocks. That time was before the virus struck. Investors do not possess crystal balls. We can’t predict when we are going to hit the bottom of the crisis. Trying to do so is likely to result in missing any bounce completely.

Long-term investment opportunity

If you have cash to invest and have a long-term investment horizon (at least five years) then this could prove to be a great time to buy. I would be hugely surprised, if in five years’ time, share prices are not well above where they are now.

If we look back to the global financial crisis of 2008, the FTSE 100 fell by 30% in just over a month. Investors who bought the index at that time, would have had a gain of around 93% since (if measured before the start of the current crash). Investors who waited another three years to invest, would have had a gain of just 26%.

In the US, the S&P 500 recovered its entire loss (of 50%) in less than a year. Since the lows of that stock market crash, the US index has risen almost 400%, even after including the latest falls.

While it may be natural human behaviour to want to sell stocks at this scary time, I believe this is now the time to buy instead.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

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, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

The flag of the United States of America flying in front of the Capitol building
Investing Articles

2 UK shares that could rise if Trump wins the Presidential election

These UK shares are among the FTSE 100's most popular stocks. And they could rise in value if Donald Trump…

Read more »

Closeup ruffled American flag representing US stocks and shares
Investing Articles

2 UK stocks that could rise if Harris wins the Presidential election

Royston Wild believes these UK stocks could receive a bump if Kalama Harris wins the Presidency, giving their share prices…

Read more »

Investing Articles

After a 96% plunge, is buying more Aston Martin shares throwing good money after bad?

Just two weeks after buying Aston Martin shares Harvey Jones found himself nursing a painful loss. Yet after recent news…

Read more »

Investing Articles

After crashing 45% in October, should I buy this FTSE 250 share for my Stocks and Shares ISA?

Roland Head explains why he’s tempted to add this risky FTSE 250 turnaround share to his Stocks and Shares ISA…

Read more »

Investing Articles

Could I use a stock market crash to turn £20k into half a mil in just over a decade?

A stock market crash might sound terrifying to some but it can also present a once-in-a-lifetime opportunity to accumulate generational…

Read more »

Investing Articles

Recently released: October’s small-cap stock recommendation [PREMIUM PICKS]

We believe the UK small-cap market offers a myriad of opportunities across a wide range of different businesses and industries.

Read more »

Investing Articles

Here’s how a Stocks and Shares ISA and Lifetime ISA could supercharge my wealth!

Individual Savings Accounts (ISAs) can help UK share investors take their earnings to the next level. And their importance is…

Read more »

A person holding onto a fan of twenty pound notes
Investing Articles

A high-yield dividend ETF and an investment trust to consider this November!

Investors wanting to boost their passive income could benefit from investigating these high-yield funds and trusts, says Royston Wild.

Read more »