Nobody knows when we will next see a stock market crash. What is beyond doubt is that it will happen sooner or later.
Markets are cyclical. As Jeremy Irons’ character in the film Margin Call reminds us, financial crashes happened in the 17th, 18th, 19th and 20th centuries.
This century is no different and we have already seen several stock market crashes, most recently in 2020.
But while a crash can be a scary thing, it is also – as Irons’ character reminds us – an opportunity to try and build wealth.
Here are two ways I would try and use the next stock market crash to do that.
Buying quality companies at fire sale prices
The first, I think, is an obvious one. In a crash, the prices of many shares plummet. In some cases, that is justified. The crash signals the end of previous ‘business as normal’ for some and they may never fully recover.
In some cases though, a share price falls to a level that seems unreasonably low, given its ongoing prospects. That can present a buying opportunity.
As an example, consider software group Sage (LSE: SGE). Between February and March 2020, its shares plummeted 30%.
Did its business prospects really change though?
At the time it was hard to know. But with a large installed customer base, a sticky product for users who had already invested a lot of time training on it and ongoing demand from small and medium businesses, there was a case to be made in February 2020 that Sage’s business ought to ride out the pandemic smoothly.
Things more or less panned out that way. Revenues fell in 2020 and again in 2021, before starting to rise again. But post-tax profits in both years were actually bigger than in 2019.
Doubling the investment value in just four years
Sage shares have been on fire, soaring 62% in the past year. If I had bought in February 2020 I would now be looking at a 55% gain in the share price. Taking advantage of the stock market crash to buy just a month later however and the value of my stake would now have more than doubled.
A crash can throw up bargain prices for brilliant companies. So what should I do about it?One thing is to try and get ready ahead of time by drawing up a list of what I think are great businesses I would love to own in my portfolio if I could buy them at an attractive price.
Making that list now means I will be ready to act in what could be a short, but lucrative, window of opportunity.
Higher yield
Lower share prices can also mean a higher yield. Imagine a share pays 5p per share in dividends annually. If I buy it for £1, my yield is 5%. But if I can take advantage of a stock market crash to buy the shares at 50p, my yield will be 10%.
The current 8.9% dividend yield at M&G is attractive to me (I already own the share). But if I had bought the FTSE 100 share during the March 2020 stock market crash, my investment would now be yielding 19.8%!
Same share, same dividend per share. But a higher yield, thanks to buying in a crash!
