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All throughout history, the stock market has weathered numerous crashes and corrections. And with prominent figures such as the ‘Big Short’ investor Michal Burry predicting an imminent market correction, I could perhaps be forgiven if I was feeling a little apprehensive.
However, stock market crashes create rare buying opportunities for investors. When prices are depressed, savvy buyers can acquire assets at lower valuations. This positions them well for future gains in the long run.
With that in mind, here’s why I’m not fearful of a potential upcoming stock market crash.
Stocks on sale
First and foremost, I think it helps to picture a market crash as one giant flash sale.
Imagine walking into a store and seeing pretty much every product selling at a huge discount with price tags far lower than what you’d usually see.
During a market crash, a similar phenomenon occurs when many UK shares drop significantly. It’s almost as if the stock market itself is having a massive flash sale.
When shares become available for a fraction of their usual cost, it often presents an opportunity for investors to buy them for significantly lower than their intrinsic value.
Being greedy when others are fearful
This reflects billionaire investor Warren Buffett’s mantra of being greedy when others are fearful.
In practice, this means capitalising on negative investor sentiment during times of market fear by buying shares in high-quality companies when it seems like nobody else wants to.
In my view, this principle applies in all market conditions.
For example, even though we’re not in the middle of a market correction at the moment, I think there are several undervalued British shares that represent buying opportunities.
This includes the British bank Lloyds and oil supermajor Shell. Both are at the top of my watchlist thanks to their relatively low P/E ratios and strong fundamentals.
Underlying explanations for cheap shares
That said, it’s worth remembering that some stocks are cheap for a reason. And this also applies during a market crash.
In particular, I’m always wary of stocks that appear undervalued due to underlying structural issues that are affecting the company.
In an attempt to mitigate this risk, I seek to carefully assess the reasons behind the undervaluation or price crash.
This involves a consideration of whether these issues can be resolved or are too significant to overcome.
Seizing every opportunity
All things considered though, a stock market crash before the end of 2023 could present me with a unique and perhaps once-in-a-decade opportunity to hoover up high-quality UK shares at a considerable discount.
After all, a crash is often followed by a rebound. This means that over the long term I could realise substantial gains as the market recovers.
Nonetheless, regardless of which way the market swings in the short term, I’ll remain on the lookout for long-term buying opportunities wherever they might be.
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