The thought of a stock market crash can be a scary one, especially for newer investors. And that’s understandable, as academic research has found that we’re wired to feel the sting of losses far more acutely than the satisfaction of gains.
In other words, it hurts a lot more when share prices go down than it feels good when they go up. And this is obviously amplified when there’s a stock market crash.
However, I think it’s possible over time to rewire/retrain your brain, and the following Warren Buffett quote helps with this reframing.
Owning businesses
If you own your stocks as an investment – just like you’d own an apartment, house or a farm – look at them as a business…Find a good bunch of businesses and hold them.
Warren Buffett
The key to not panicking in a market crash is to view your portfolio as a collection of businesses rather than just stocks. As a long-term investor, this is how I view things — I own small pieces of real-world companies.
Therefore, because I’m very familiar with the businesses I’m invested in, I don’t tend to panic when the stock market tanks. Such meltdowns are often related to investor sentiment or some sort of macroeconomic concern rather than the actual businesses I hold and their future prospects.
This sounds quite a trivial difference, but it’s really not. In fact, it often gives me the confidence to buy more shares when they’ve sold off heavily.
“To be greedy when other are fearful“, as Warren Buffett famously advised.
In contrast, someone who just owns a bunch of stocks is likely to feel bewildered and fearful during a market meltdown. Often, the only value they attach to them is the price they currently trade at. And when that plummets, what is left to hold onto?
Here are some basic questions every long-term investor should be able to answer about a company they’re invested in:
- Who is running the company, particularly the CEO(s)?
- How does the company make money?
- How profitable is it?
- Who is the competition?
- What competitive advantages does it possess?
- What are the key risks?
- How cheap/expensive are the shares today?
A stock example
Know what you own, and know why you own it.
Peter Lynch
One holding I wouldn’t fret about too much during a broad market sell-off is Axon Enterprise (NASDAQ:AXON). The company sells Tasers, bodycams, software, and counter-drone services to law enforcement and other agencies worldwide.
Whatever is happening in the stock market or if there’s a recession, I’m certain that police officers are not going to stop using Tasers and bodycams. The first saves lives by reducing the need for bullets, while the latter improves accountability.
The reason I own shares in this firm is because the long-term growth opportunity is very large. While its Tasers and bodycams are well established in the UK and US, the penetration rate across markets in Latin America, Asia, and Africa is around 1%-5%.
Of course, there are still company-specific risks. One is a high valuation, with investors pricing in strong future growth (Axon has delivered nine consecutive quarters of 30%+ revenue growth). If growth slows unexpectedly, the stock could tumble.
However, given the large opportunity ahead, I think the stock is worth considering while it’s 40% cheaper than last summer.
Should you invest £5,000 in Axon Enterprise right now?
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Ben McPoland owns shares in Axon Enterprise.
