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I’m getting ready for a stock market crash

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Could there be a stock market crash on the horizon later this year? Nobody knows, in reality. The timing of the next crash is always speculation rather than fact.

What does concern me though, is that there are some real storm clouds gathering in the world economy I think are not being properly factored into share prices. From weak consumer demand in large markets to high interest rates and ongoing inflation, any number of factors could hurt the economic outlook. Yet stock markets continue to perform fairly well. The FTSE 100 has hit a new all-time high this year and remains less than 7% away from it.

I do not want to be caught napping when the next stock market crash comes. So rather than spend a lot of effort trying to predict its timing, I am focusing on getting ready for it.

Bargain hunting

At the moment, many well-known shares on the London stock market already look cheap to me. Blue-chip names on the FTSE 100 from Lloyds to Legal & General trade on price-to-earnings ratios in the mid-single digits.

Yet despite some apparent bargains, I think many shares could fall further if there is a widespread crash. Lloyds shares performed weakly in the last financial crisis, for example, and have never regained the price they sold for beforehand.

As the 2020 stock market crash showed, uncertainty can even push down the share prices of companies that end up continuing to perform well, despite a nervous market. British American Tobacco, for example, saw its shares fall 26% in under two months, even though its 2020 earnings per share ended up topping those of the prior year.

Clearly, a crash can throw up some real bargains. But how can I try to find them?

Long-term potential

For me, a stock market bargain is being able to buy a share for substantially less than I think it will prove to be worth in the long term.

To do that, I try and estimate what I think a company will be able to earn in future. This is where a stock market crash can make things interesting (and difficult). Some businesses, like British American back in 2020, may see little impact of a crash on their business. But for others, a crash could mean future earnings will fall. That could be because the crash itself reduces demand. Or it could be because a cause for such a stock market crash – like a weaker economy – dents demand and reduces profits.

Getting ready today

Having decided what I think a company will be able to achieve, if it is one I would be interested in owning in my portfolio, next I need to consider its valuation. What would be an attractive enough price for me to buy it?

Doing that now means I can be ready whenever the next stock market crash happens. I will be ready with a shopping list of shares I want to own – and what I think is a good price to pay for them.

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