2 Simple Rules for Picking up Bargains during a Market Crash

“I don’t try to jump over 7-foot hurdles: I look for 1-foot hurdles that I can step over.”

– Warren Buffett

The quote above from investing maestro Warren Buffett suggests that investing should be – to borrow a phrase from Albert Einstein – kept as simple as possible, but not simpler.

This approach may be useful in today’s context when we look at where the Straits Times Index (SGX: ^STI) sits. From its high in April this year up till last Friday, the market barometer has fallen by 18.6%, suggesting that there could be bargains in the stock market now.

With Buffett’s mantra in mind, we may want to start with simple rules when looking for investing opportunities. Here’re two simple rules to consider.

Net cash on the balance sheet

“Cash, though, is to a business as oxygen is to an individual: never thought about when it is present, the only thing in mind when it is absent. When bills come due, only cash is legal tender. Don’t leave home without it.”

– Warren Buffett

As Buffett notes, bills are paid with cash. If there is one simple rule to begin with, that’s to start with companies with a strong balance sheet – in other words, those with net cash positions (where cash exceeds the level of borrowings) on their balance sheets.

There are many companies in Singapore’s stock market that fall into this category. OSIM International Ltd (SGX: O23) could be one candidate.

The lifestyle products retailer (OSIM sells massage chairs and luxury tea products) reported a net cash position of $216.5 million in its last earnings report for the second-quarter of 2015. Having more cash than borrowings tells us that OSIM may be better-equipped to endure a prolonged downturn in the economy, if it happens.

Free cash flow

A strong balance sheet may be good to have, but it will mean less if the cash is used up within a short span of time. As such, we may want to look for companies with a good track record of generating free cash flow (operating cash flow minus capital exepnditures) as well.

Free cash flow can either strengthen the balance sheet or be distributed as dividends; both are positives for investors.

One candidate for further research could be luxury watch retailer Hour Glass Ltd  (SGX: AGS). Over its past five fiscal years, Hour Glass has registered steady free cash flow generation. This is summarized in the chart below:

Hour Glass - 2

Source: Hour Glass’s earnings reports

Foolish summary

The two simple rules above represent starting points to help sieve out good candidates for further research. This may help us pare down our investing universe as we look for bargains during a market crash.

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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 owns shares in OSIM International.