How to Behave Right in an Inevitable Market Crash

You may have heard that the share market will crash one of these days (if the crash is prolonged and deep, it may even turn into a painful bear market). The question, though, is not about when the market will crash (no one actually knows), but what you would do when it does.

A bear market ain’t a bed of roses

To know what to do during bear markets, we can first start by understanding what a bear market feels like. To this, hedge fund manager Seth Klarman had vivid thoughts to share.

Klarman is the founder and president of Baupost Group, a hedge fund company that has compounded returns at an impressive annual rate of close to 20% since 1992. Here’s how Klarman described a bear market:

“In a protracted bear market, you will be unique if you aren’t questioning yourself. Everything you thought you knew starts to seem wrong. Everything you bought thinking it was a bargain will appear, at least for the time being, not to have been a bargain at all.

Now, at a lower price, the stock may indeed have become a bargain, but do you like it as much as you thought you would now that its price is lower? Or are the facts worse than you thought, the earnings and cash flow eroded, the “compounder” blemished, or are other bargains now simply more appealing?

Whereas you once may have said that you would “back up a truck” at such discounted prices, you may find that you imagined wrong, and you have neither the desire nor the capital to add to positions as they hit new lows.”

You get his point. Bear markets are rough and they are tough to manage. We may think that we have what it takes to snap up bargains in those times, but when actual bear markets hit, we might end up questioning our companies and quickly lose the confidence that we had before the crash. Above all, we may even start questioning ourselves.

Behaving right by buying right in a bear market

The good news is that preparing for a market crash doesn’t have to be complicated. If we want to be buying during a market crash, we need to prepare ourselves for it. Some of these steps could include:

  1. Studying historically strong companies
  2. Keeping a watchlist of great companies
  3. Building a cash cushion
  4. Patience!

Candidates for further study could be companies like aircraft engineering outfit SIA Engineering Company Limited  (SGX: S59) or vehicle distributor Jardine Cycle & Carriage Limited (SGX: C07). Both companies managed to raise their dividends by more than 30% even during the Global Financial Crisis. You can read more about SIA Engineering here, and Jardine C&C here.

Foolish summary

As Klarman describes, market crashes and bear markets are not going to be easy. But with a few steps taken in advance, we may find our courage to buy during those tough times.

To be sure, this is not to say that we should wait for the next crash only before we invest. But, we can certainly still prepare ourselves for the next inevitable crash.

To learn more about Foolish investing and to keep up to date on the latest financial and stock market news, sign up for a FREE subscription to The Motley Fool's weekly investing newsletter, Take Stock Singapore

Also, like us on Facebook to follow our latest hot articles.

The Motley Fool's purpose is to help the world invest, better.

The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chin Hui Leong doesn’t own shares in any companies mentioned.