Nobody knows what will happen in the stock market next week, let alone further ahead.
So when people say they expect a market crash or boom, they are making a forecast. Some such forecasts may turn out to be true in the end. But that is not possible to know ahead of time.
I therefore am uncertain what 2024 will bring in the stock market. What I do know, however, is that sooner or later we will see another market crash. Here is how I would get ready for it, whenever it eventually comes.
Focussing on valuation
I would like to build a portfolio that would hopefully suffer less in a crash than if I owned other shares.
So when looking for shares to buy, I focus carefully on valuation.
Some investors ignore valuation. Even if a hot share is overvalued, they figure, it can keep on going up if other investors want to buy it.
I see that as speculation not investment. I am not buying shares because I expect their price to move up in the short term. Rather, I am choosing ones I think currently trade at well below what I see as a fair price for them.
Getting ready to act
Valuation informs my approach to preparing for a crash.
At any one time, there are companies I like and would happily invest in. But their price makes me decide not to. If it came down to what I saw as an attractive level, I could make a move.
So I spend time to prepare a list of businesses in which I would like to invest, as long as I could buy their shares at the right price. If a market crash gives me a short-lived opportunity to do that, I want to be ready to act before the moment has passed.
An example of such a company is Judges Scientific (LSE: JDG).
The business buys up small and medium-sized makers of specialist instruments like those used in lab experiments. I see that as a market that is likely to benefit from enduring demand. Customers’ need for total precision means they are willing to pay a premium price for quality products.
That has helped Judges build a profitable business that has regularly grown its dividend. I do see some risks ahead. For example, logistics disruptions could push up the costs of transporting fragile instruments, eating into profits.
Overall, though, I like the look of the business. But so do many investors. The company’s price-to-earnings ratio of 73 is far too expensive for my tastes.
So I have added it my watchlist of stocks I would consider buying during the next market crash, if their prices fall enough.
