Will the stock market surge this autumn? Or will we see a stock market crash? Nobody knows.
On one hand, some economies are showing more resilience than expected in the face of slowing consumer demand. Given how cheap many UK share valuations currently look, that might justify a sharp upward movement in prices.
On the other hand, there are signs that a lot of large economies – including the UK – are slowing down considerably and could enter a recession in the coming year or so.
That may yet lead to a stock market crash.
The challenges of market timing
As a small private investor, there is no way for me to know when the next stock market crash might come.
One thing I do know, however, is that it will come. Whether soon or years out, at some point we will see the sort of rapid decline in market value that characterises a crash.
Rather than trying to time the market, I am acting ahead of events by getting ready for such a crash now, whenever it ends up coming.
Valuations and market frenzies
In practice, what does that mean?
The key characteristic of a crash is, of course, that a lot of shares tend to lose value rapidly at the same time. In some cases that may be because broader economic circumstances have changed the business outlook for a company. Sometimes, though, it is a case of panic-selling pushing down good companies as well as weaker ones.
Step back to 2020 for some examples. In the crash around the beginning of the pandemic, lots of companies lost value. In some cases, that reflected real concerns about their business prospects.
But consider National Grid, which lost 18% of its value between February and March of that year. Was the business worth almost a fifth less? I do not think so – and neither did the market ultimately, as the shares later regained all of that lost ground and more.
Making money in a crash
In fact, I think that sort of frenzied selling in a stock market crash could offer an investor like myself a golden opportunity.
Put simply, I hope that I could buy shares in great companies at markedly less than I think they are worth.
The thing is, although the market can behave in seemingly irrational ways for a short time, over the long term it tends not to offer up such strong bargains in plain sight.
That is why I think I need to be ready to act when the next stock market crash happens, as the window of opportunity for me could be short.
So right now, rather than spending time trying to forecast the timing of the next crash, instead I am drawing up a shopping list of brilliant companies I would like to invest in if their shares become available at an attractive valuation.
