Finding Your Comfort-zone During Stock Market Crashes

Everyone has their own set of fears.

This emotion becomes more apparent during chaotic times in the stock market – like what we’re seeing now. For context, Singapore’s market barometer, the Straits Times Index (SGX: ^STI), has fallen by nearly 20% from its close yesterday compared to the 52-week high that it had hit back in April.

If we consider the mass-selling of stocks as a proxy for fear, then I think it’s reasonable to say that fear is fairly widespread at the moment.  

Investment opportunities can be found in times of great fear. Thing is, acting on the opportunities you find during fearful environments may not be as easy as it sounds.    

Blood on the streets… some of it may be your own

In an article I wrote late last year, I talked about my first experience with a stock market downturn which happened ten years ago. Back then, I freaked out and sold in haste, being fearful of losing my money.

Thankfully, I have managed to learn from my initial experience and resolved to hold my stocks for the long run. In fact, some of the companies which I am holding today were bought nearly ten years ago.

So, a good question might be: What changed my mind?

For one, I discovered that good companies that fall during stock market crashes tend to bounce back if their underlying earnings, cash flow, and balance sheet remain strong.

As an analogy, if I am holding an envelope with $10 in it (my stock holdings), I will not be tempted to sell it for anything less than $10 because I understand the value ($10) that is in the envelope. If I did sell, that would be akin to me saying that I do not want a perfectly good $10 bill in an envelope.

Meanwhile, I also came to understand that a stock’s price is unlikely to go to zero if the company has a strong balance sheet with a net-cash position (meaning to say the company has more cash than debt).

These understandings came to form my comfort-zone which has allowed me to hold my stocks, or even add new positions, during the inevitable market crashes which happen every now and then.

Foolish Summary

Comfort-zones in investing may differ for each individual. Some may find the steady drip of dividends to be a smoothing thought. Others, like myself, find comfort in just plain earnings, free cash flow, and net-cash on the balance sheet.

As my colleague Morgan Housel once shared:

Said another way, if we can keep calm during times of difficulty (like during stock market crashes), we might be able to finally see crashes as opportunities rather than risks.

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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.