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3 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 yesterday, the market barometer has fallen nearly 20%, 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 three to consider.

Rules 1 and 2. Net cash on the balance sheet and free cash flow

You can read about the first two rules here.

Rule 3. A business that you can understand

Keeping it simple might mean choosing businesses that you can understand easily.

As Foolish investors, our goal is to hold companies for the long run. Being able to easily understand the businesses can also help us follow the company’s progress and determine whether any bumps along the way are – as Motley Fool’s co-founder Tom Gardner would put it – minor nicks or life threatening injuries to your investment.

As an example, it may be easier for a common investor to determine whether a new food & beverage concept from a competitor will threaten the business of BreadTalk Group Limited (SGX: 5DA) as compared to say, the impact of changes in commodity prices to Noble Group Limited (SGX: N21).

To the latter point, my colleague Stanley Lim has noted that Noble “has roughly 12,000 contracts with various commodity producers and customers.” Swings in commodity prices will have impacts on these contracts.

Where would you prefer to start your research?

Foolish summary

The three simple rules above represent starting points to 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 doesn’t own shares in any companies mentioned.