Why investors don’t need to wait for a stock market crash to buy shares
Historically, stock market crashes have been great times to buy shares. Prices are unusually low and investors typically stand to do well when things get back to normal – whenever that happens.
In general, it’s better to buy a stock at a 20% discount. But I don’t think investors should hang around waiting for a crash before looking for opportunities.
When is the next crash coming?
One problem with waiting for a crash to buy stocks is that prices might go up for a long time before that happens. A look at Rolls-Royce shares over the last year is a good example of this.
A year ago, the Rolls-Royce share price was up over 1,000% from its Covid-19 lows. So investors might have been tempted to think they should wait for a market crash before buying.
This, however, would probably have turned out to be a mistake. The stock is up another 95% since then, so even if it falls 30% from here, investors would still have done better by buying last year.
That’s one reason why waiting for a stock market crash is a mistake – it doesn’t guarantee better opportunities. But it’s not the only reason.
Not all stocks are the same
Even when the stock market as a whole isn’t crashing, sharp moves in individual stocks can present attractive opportunities. One example is FTSE 100 distributor Bunzl (LSE:BNZL).
Back in April, the stock fell 25% in a day and it has stayed at roughly that level since then. If the stock market as a whole had done that, it would have been classified as a crash.
As it happens, the FTSE 100 actually went up slightly. But for investors thinking about buying Bunzl shares, it doesn’t really make much difference what other stocks are doing.
The price investors pay for Bunzl shares after a 25% decline is the same whether the rest of the FTSE 100 goes up, down, or sideways. And that’s why I bought the stock for my own portfolio.
What matters to investors
From an investment perspective, what matters is how much cash the FTSE 100 company is going to generate over time and what the current share price is. And I think the equation looks attractive.
Share prices generally don’t just crash for no reason at all. In Bunzl’s case, investors were reacting to a weak trading update where the firm lowered its guidance for 2025.
The firm has had difficulties executing a new operating model in North America. While management is taking action to try and rectify this, the risk is that it continues to weigh on margins for some time.
I think, however, that Bunzl’s key strength – the scale of its distribution network – is still firmly intact. And this is what I see as key to long-term returns from the stock.
Being opportunistic
Investors don’t need to wait for a stock market crash to find potential buying opportunities. In fact, doing so doesn’t always result in lower prices.
Whether it’s Bunzl or any other stock, a falling share price can be just as good as a stock market crash. The key for investors is to be ready to take advantage when chances present themselves.
The post Why investors don’t need to wait for a stock market crash to buy shares appeared first on The Motley Fool UK.
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Stephen Wright has positions in Bunzl Plc. The Motley Fool UK has recommended Bunzl Plc and Rolls-Royce Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
