Investing

5 Things to Do During A Stock Market Crash | Re-ThinkWealth

Chris Lee Susanto, Founder at Re-ThinkWealth.com

24 November 2018

5 things to do during a stock market crash, re-thinkwealth.com

If you are an investor of stocks, you would know that currently (as of November 2018), we are in a (or nearing) stock market correction/bear territory. Before things get worse, here are 5 intelligent things to do during any stock market crash.

Here is your playbook for successful investing:

1. Don’t Panic

5 things to do during a stock market crash, re-thinkwealth.com

Source: Yahoo Finance

As you can see from the above image, as of 19 November 2018, the recent stock market correction has erased all of the 2018 gains for the S&P500. And a little more. The S&P 500 started the year at $2695.81. As of 19 November 2018, it closed at $2690.73.

The STI ETF is also not doing well either this year. Based on Yahoo FInance, the STI ETF went from as high as 3.66 on 24 January 2018 to 3.02 in 29 October 2018. That is a drop of about 17.5%. Near a bear market territory (defined as a 20% drop from previous high).

Recently, a Morgan Stanley analyst called Michael Wilson has also just sent a six-word reality check in a research note to its clients: “We are in a bear market.” The S&P 500 or the STI ETF may not have dropped by 20% from its previous all-time high. But some of our stocks holdings may have fallen more than 20%. Especially the technology or growth stocks.

How did your stock holdings do? I am sure that the past few weeks have not been a smooth ride up.

The first thing to do is not to panic. As Warren Buffett has said, a rattled mind will not make good decisions. And as a good value investor, we have to stay calm.

2. Be Realistic in Re-Assessing The Fundamentals of The Companies You Own

So you have bought some stocks. And due to the market crash, the price of your stock holdings fell. As a human being, it is normal if you subconsciously gravitate to defending your stock positions and say that you are right. Nobody likes to be wrong. But we have to be realistic. The father of value investing Benjamin Graham often said that value investor is a realist who buys stocks from the pessimist and sells to the optimist. We have to be a realist. We have to realistically assess the fundamentals of the companies that we are vested in during a market crash. Are we wrong? Are we right? Be a realist.

Based on a Harvard Business Review article, it said that Intellectual Humility is key. Being intellectually humble means that we should have the willingness to change, plus the wisdom to know when we shouldn’t. During a stock market crash, we need to have intellectual humility.

The fundamental of value investing is that behind every stock is a company. If the company do well, the stock will do well. If the company does badly, the stock will do badly. During a stock market crash, we need to re-assess the companies behind the stocks that we hold. Are they doing well or are they doing badly?

There are different parts of a company that we need to re-assess. First up, the company’s ability to be profitable and provide good amounts of free cash flow. If they pay dividends, take a close look at their payout ratio. We need to also see how well are they managing their debt. Management’s compensations and ability to manage well is an area we should analyze well too. Last but not least, their valuation. We need to be realistic in valuing the companies’ stocks that we are vested in. It is best that we have different possible scenarios simulated when we are doing our valuations. We have to also be conservative in our valuation assumptions. Remember not to forget to apply the concept of margin of safety.

When we re-assess the fundamentals of our company, be aware that we humans are emotional creatures. Be aware of the subconscious influences that we have as a human being. Some of the harmful subconscious influences include overconfidence and confirmation bias. Overconfidence is harmful because we might think we are unbeatable and we are always right. Being overconfident means that we are less likely to admit we are wrong. We have to be ready to admit we are wrong and cut our losses. Confirmation bias is especially harmful because subconsciously, we tend to look for only evidence that confirms our beliefs. Even though, our beliefs may be wrong. In confirmation bias, we are not being objective. We are not looking at evidence from both sides and take a look at it seriously. Be aware if we are being overconfident or displaying confirmation bias behavior.

The process of losing money is painful. We can feel regret on why we did not sell our stocks sooner. A lot of negative emotions may be flowing through our body. We may continuously look for news and evidence to comfort us that we are still alright. It is normal. But stop, be logical. Re-assess the fundamentals of the companies that you are holding objectively. Being a realist is key to be successful in value investing.

3. Decide What You Want to Do: Sell, Buy More or Do Nothing

“In life and business, there are two cardinal sins. The first is to act precipitously without thought and the second is to not act at all.” – Carl Icahn

After we have re-assessed the fundamentals of the company that we own, the next thing to do is to decide what do we want to do with our stock holdings:

  1. We can sell. Because we realized that we are wrong.
  2. We can buy more. Because we think that based on the latest facts, our thesis still holds and there are no other stocks in our radar that are more undervalued than this one.
  3. We can do nothing. If we are right and although these stocks are undervalued, they are not currently a strong buy.
  4. Also, we can do nothing if we simply have no cash left. And yet we think our thesis remains solid based on the latest facts.
  5. We can hold some and sell some to buy other stocks. If other stocks have a better price to value proposition. But we still want to have exposure in our current stock holdings.

In any case, decide what you want to do. Sell, buy more or do nothing.

4. Pen Down Your Thought Process That Leads to Your Decision

It is important that we pen down our thought process that leads to our decision in a particular moment in time.

Being a successful value investor is not easy. Having the right thinking and investment decision process is important. With the right thinking and decision process, naturally good results will follow. Different people have different thinking and decision process. This is because different people have a different character. It is important to know the cause-effect relationship between our character and our thought process and our decision. That is why penning down our thought process that leads to our investment decision is important.

5. After Some Time, Assess If You Made The Right Decision. Learn From It.

“The game of investing is a process of discovering who you are, what you’re interested in, what you’re good at, what you love to do, then magnifying that until you gain a sizable edge over all the other people.”- Li Lu

The game of investing is a continuous learning process. To be a good investor takes a long time. By writing down our thought process that leads to our decision, we are able to learn. After some time, we are able to know whether what we did was right or wrong. Most importantly, we can learn from it if we are wrong. And repeat it if we are right. In any case, we can only be a better investor if we keep on learning. Only those that keep on learning & reflecting will keep on rising on life.

In summary, during a stock market crash, these are the 5 steps you need to do: [1] Don’t panic, [2] Be realistic in re-assessing the fundamentals of the companies you own [3] Decide what you want to do: sell, buy more or do nothing [4] Pen down your thought process that leads to your decision [5] After some time, assess if you made the right decision and learn from it.

Disclaimer:

The information provided is for general information purposes only and is not intended to be a personalized investment or financial advice.

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