A stock market correction is typically defined as a decline of least 10% from a recent peak. If the fall becomes more substantial, reaching 20% or more, it’s often referred to as a crash or bear market.
If a market crash is like a hurricane, and therefore pretty rare, then a correction is like a gale or storm. The London Stock Exchange has experienced dozens of corrections over the last two centuries. They do whip up fairly regularly.
Unfortunately, we don’t often get a weather warning and they can happen suddenly. As Warren Buffett has pointed out: “No one can tell you when these will happen. The light can at any time go from green to red without pausing at yellow.”
The important thing to remember is that, like storms, they have always proved temporary. This means they can often throw up bargains.
At 7,465 points, the FTSE 100 is currently around 7% below the record high it set in February last year. But while we’re not in official correction territory yet, my Stocks and Shares ISA remains ready for one this year.
Keeping some powder dry
Last year, I harvested some gains from my largest holding. Half of that cash is still sitting in an easy-access savings account paying me 5%. I’m specifically keeping it there until there is another market wobble.
Without this, my choices might be limited to dipping into my emergency savings fund, selling shares to buy shares, taking on debt, or using dividends earmarked for reinvestment.
None of these are desirable to me, especially gearing. Therefore, it’s far better to keep some powder dry for investment opportunities that a stock market storm might blow my way.
Best ideas
Admittedly, it can be overwhelming when share prices start dropping and there’s a sea of red spreading across my portfolio. Should I wait for stocks to drop further? How long will this last? What should I buy?
Again, preparation can help here. I keep a spreadsheet of stocks that I’d love to buy but that are trading too richly as things stand. It’s basically a want list containing some shares I already hold and some I don’t.
This immediately directs me to my best ideas, which I can use to assess whether any stocks have dropped enough to warrant taking action.
One on my wish list
A FTSE 100 stock that I’d like to buy more of is Auto Trader Group (LSE: AUTO).
As the UK’s leading online marketplace for vehicles, the name will be familiar to many consumers. In the 12 months to March 2023, Auto Trader averaged 69.6m monthly visits!
Its partnerships with almost 14,000 vehicle retailers, manufacturers, and leasing companies creates a powerful network effect. In other words, more car sellers attract more buyers, which makes the network more valuable for all participants. This is the company’s key competitive advantage.
Plus, as an asset-light, cloud-based technology platform, it generates a tonne of cash and boasts an incredible 44% net profit margin. The ongoing transition to electric vehicles (EVs) should keep site activity high.
However, due to these attractive qualities, the shares do trade at a risky premium of 27 times earnings. I’d like to scoop up more at a cheaper price.
