How To Prepare for the Next Stock Market Crash [Lessons Learned]
Hook- People are constantly trying to predict when
the next stock market crash will happen. It’s a tale as old as investing itself. Practically
every day you can find someone who thinks the market is about to collapse. They may
even provide logical arguments for why it should, but the only certainty is that nobody
can predict exactly when it will occur. Even Michael Burry, who correctly forecasted and
profited off the 2008 real estate bubble, had to hold his credit default swap short
positions for nearly 3 years before he was eventually proven right. However, just because
you can’t predict when the market will crash, doesn’t mean you can’t be ready to take
advantage of it. In this video, I’m going to explain the lessons I learned from the
2020 crash and how to prepare for the next one.
It’s always sunny conspiracy board, peter schiff clip, Michael Burry Big Short
(Into Vid)
Intro- My name is Zach and you should leave a like
and subscribe to the channel if you enjoy the video. Today, I want to share my strategy
for how to take advantage of the next stock market crash.
Content- It’s an understatement to say that 2020
has been an unpredictable year. The public health crisis, rampant unemployment, and economic
shutdowns are just the start. Yet through all this, the stock market has recovered from
March lows, and is once again hitting record highs. It seems that there has been a decoupling
between wall street and main street. Many Americans are doing better than ever, while
others are suffering. On top of this, we’ve seen government stimulus and money printing
at an unprecedented scale. However, with the vaccines on their way it seems we could return
to a sense of normality in 2021. I, along with most people, have no clue where
the stock market will go. In a December interview with Caltech, one of my favorite investors,
Charlie Munger spoke publicly about the economic climate.
(Charlie Munger Video) According to Charlie, we’re entering “Uncharted
waters” and “near the edge of playing with fire”. That should certainly leave
people at least a little concerned, but does not mean you should be fearful of investing.
A potential market crash or correction is nothing to be fearful of and this is shown
by history. (Peter Lynch Video)
Nobody knows when a market downturn will occur. The most important thing to remember is that
corrections and crashes are actually an opportunity. A stock becomes less risky, not more, as the
price goes down. As a long term investor, you need to have the stomach to buy, not sell,
as the market goes down. Flipping that mental switch is the first step to successfully navigating
a crash. Beyond that, you need to prepare and set your
plan for this kind of market environment. This step is often neglected. I realized this
the hard way, as I was caught unprepared to fully take advantage of the sudden 2020 market
collapse. In December 2019, I had just started forming
my long term dividend stock portfolio. I still had a lot to learn and compiled a list of
dividend aristocrats, champions, and kings to build a foundation from. These are stocks
that have been consistently increasing their dividends for long periods of time. Since
the market was high at the time, I was slowly adding to positions which seemed to be at
a relative value. These companies often had existing short term troubles or a turnaround
story resulting in it being priced lower in the market. This fact itself wasn’t necessarily
a mistake, although I certainly didn’t do as much research or understand the underlying
companies as I do now. The main problem came when the market started to crash.
In late February and March, I continued to buy but kept purchasing many of the same stocks
from before. This resulted in me blowing a lot of cash into these “weaker” companies.
Not all of them were bad investments, but they certainly weren’t the staples I wanted
to build my portfolio around. By the time the real quality blue chip companies had significantly
lower prices, I was much lower on cash to invest. This led to me missing a lot of good
deals. I ended up with an unfocused scattershot of companies, which you can see if you go
back and watch my first monthly portfolio update back in May.
This is the principle to understand about market crashes. Lower quality or less loved
stocks fall faster and rise slower. While, blue chip companies fall slower and rise faster.
Let’s look at an example. A stock like Johnson & Johnson nearly fully recovered from march
lows in under a month. While, A stock with a perceived debt problem and more of a turnaround
story like AT&T had a slower rise and more dips along the way. It’s for this reason
that you need to laser focus on quality during a crash. Opportunities in the less loved stocks
will be around longer. Now that this is understood, how do we prepare?
I suggest creating a list ranking your top stocks in terms of quality of the company.
These are stocks that you’d want to be staples in your portfolio. For example, as a long
term dividend investor, my current list is Apple, Microsoft, Disney, Walmart, Johnson
& Johnson, McDonald's, PepsiCo, Lowe’s, Procter & Gamble, and 3M. There are many other
names you could include and everyone's list will vary, but it’s important to think it
out and build your list. You can edit it over time and even add price targets for when you
think it’s a good value. Then as soon as a market crash happens, open
up your list and focus on those stocks first. I guarantee that having this list ready to
go will give you focus and make you far better prepared to navigate a market downturn.
Bonus- Now, I’m not saying that you should only
buy these stocks during a crash. In fact, I believe that quality of the underlying business
is by far the most important part of buying a stock. I think Warren Buffett provides fantastic
cadvice on when to buy
a great business. (Warren Clip)
To summarize the main points of this video, a market crash is nothing to fear and is in
fact an opportunity. In these downturns, you should prioritize buying quality companies
you want to own forever. However, you should not wait exclusively for times of crisis to
try and invest in these companies. Time in the market is better than timing the market.
Call To Action- Thank you for watching Dividend Data. I’d
greatly appreciate it if you leave a like and subscribe to the channel. If you follow
me on twitter, link in the description, you can real-time updates of my buys and dividends
coming in. You can support the channel on patreon and be a part of helping make these
videos happen. The link is in the description. Please leave a comment below and thank you
for watching!